ISEing your Odds

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There are also many tools that can be utilized in conjunction with Core Strategy to increase your odds for success. One such tool is the ISE Sentiment Index (ISEE) that is now available on the Nasdaq website.

The ISE Sentiment Index is a sort of Put/Call Ratio with a twist.  The Put/Call ratio has long been used as a sentiment indicator to gauge whether investors and traders were becoming too bullish or bearish on the markets.  If too many people were buying puts over calls, then the stock may be oversold and poised for a bounce.  The ISEE goes a step further and only counts NEW put and call positions being opened by small investors and traders.  It ignores currently open positions to find the current sentiment in real time.  The ISEE also filters out institutional positions so the data does not become skewed by them hedging positions instead of taking advantage of potential market moves.  Remember, an institution buying puts may not be bearish as they may want to protect a major long position or may even sell calls to reduce cost basis.

The majority of dumb money, which includes small investors, traders, and people we know of as the herd, are usually wrong at timing major turning points.  We can use the ISEE to determine when the bullish or bearish dumb money sentiment has become so great that the market may be at a turning point.  If the ISEE closes at an extreme level, it usually marks a reversal point in the market.  Remember, the reversal may not be immediate, the move usually occurs shortly after the extreme unless prevented by Fed actions, major news effecting the market, or acts of terrorism.

In order to read the ISEE, you will to the Nasdaq website, scroll down to the ISEE Index Chart and choose All Equities Only from the View dropdown menu.

The low level sentiment reading is a close below 100. Remember, the intraday data is nice, but the closing value is the most important.  If you see a close below 100, expect a broad market rally.  The high sentiment reading is 200.  If you see the closing value on a given day is over 200, expect a sell-off in the markets.  That’s it!  Pretty simple isn’t it?

Well, those are the basics but there are some related articles on how to use the indicator in a more advanced manner on the ISE website. You can also go to the Market Data and Trading Tools tab on the left of the site and see more information on the ISEE. You can even get a chart of the index including moving averages.

On the chart above, I highlighted the most recent closes below 100 and above 200. Let’s examine what happened with the S&P 500 after these extremes on the chart below.

What did the market do after that close?  Looking at the following chart of the S&P 500 we see that the markets recently sold off on extreme readings on both sides. This is a bit unusual as normally a reading below 100 would precede a rally.

I hope you enjoyed learning about this indicator and please contact any of our excellent instructors at Online Trading Academy if you have further questions or need assistance in becoming the best trader you can be.  Until next time, may all of your trades be green and your losses small!

Read the original article here - ISEing your Odds

 

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