Secondary Contrarian Indicator

[Natalia]

Scott O'Neil just posted a new blog today that you can read and look at the chart from the link below:

Link: http://community.marketsmith.com/telligent/b/blogs/archive/2013/03/15/14674.aspx

In it he said:

The market continues to move into new highs on lower volume. This technical action tells us that we are due for a pullback. In addition, the put vs. call trading volume chart as seen in IBD on page B2 shows an extreme low. Generally, this indicates that most investors are very bullish, which is a contrarian indicator. Although, we consider this to be a secondary indicator to price/volume action on the major indexes, the market is extended and caution is warranted. Most certainly, do not chase an extended stock, but if you own the right stocks and have a decent cushion, then you have the luxury of letting them play out further and/or adding to positions on any pullback. Also, watch all of the leading stocks; most of their pullbacks should be less severe than the rest of the market.

Best returns,

Scott O’Neil

President, MarketSmith Incorporated

 Follow Scott O'Neil at Twitter.com/WScottOneil

I attach picture of them here. I look at several secondary indicator, but still need to wait fro the price action to confirm. We make (and lose) money from "PRICE" not indicator.

• Put to Call ratio. Put and Call are options. People would buy put if they believe that the price will go down. People would buy call if the believe the price will go up. More people buy put indicates fear, people expecting price to go down. More people buy call indicate greed, people think that price will go up (forever?). I have learned in the past. when the Put to Call ratio is above 1.2, market is near a bottom, and when Put to call ratio is below 0.4 (or around there) market is near a top. Last night on the newspaper (3/15/2013 edition) the Put to Call ratio is at 0.48. 
• Another secondary indicator that I followed is the AAII Bull vs. Bear survey. it is updated every Wednesday. and last Wednesday we have 50% bull and 18.8% bear. This also a contrarian indicator. When the difference widen more than 30 points it can also point to a trend change.

Remember always watch the price action first and foremost. indicator that is not conform by price is worthless. Be safe and preserve your capital for better times ahead.