Beware the Ides of March -
Put Buying Continues

Dave Skarica
Mar 19, 2007

What is always fascinating is psychology of markets. Even when it is obvious that a pullback has to happen, people get sucked into the direction of the market. For example, if you look at the market's climb from last June to February of this year, it is apparent that the climb was not the norm. Never before had the market moved so slow and steady. There wasn't as much as a 3% pullback, which is unheard of for any 6 month period in the stock market.

Volatility is usually part of the game and over the past few weeks we have seen volatility creep back into the market. What we are surprised at is the amount of fear that has crept into the market on just a 7-8% decline. The VIX, which measures premiums investors are paying for put options nearly doubled from 11 to 21.

More interesting is the amount of put buying that is going on. We are shocked at the high preceding levels, especially on the CBOE (Chicago Board of Options). The 10-day moving average on the put/call ratio is 1.29 as we write, meaning 1.29 puts are being purchased for every call purchased on the CBOE. This is the highest level of the past 18 years (the furthest back which our numbers go). In addition, the 10 day moving average of the Equity Put/Call ratio is 0.82. This is on par with the levels scene at the 2001 and 2002 market bottoms.

It is hard for us to envision the market falling out of bed with massive put buying going on.

On Thursday we saw a very interesting day in the markets. The market challenged its low of the prior week then reversed and finished higher. The VIX spiked to over 20 that day and the Put/Call ratio was sky high in the middle of the day when the Dow went below 12,000.

Now the question is , was just a bounce of 12,000 or a successful retest. Either way we think the market is nearing a significant rally. The Dow may have to decline to 11,600 or so before it can start this rally. How the market acts during this rally is going to tell us whether this is just a pullback or the start of a pullback.

We are still bullish on the precious metals complex. We must note that the precious metals are trading with the market at the moment. Therefore, any downside pressure in the general market, the gold stocks could trade lower. The key level on the HUI is the 310 area , which held on the market's decline last week. If we go through 310 we may have to go back to the 280-300 area before bottoming.

An interesting note was Gold's ability to rally nearly 6 dollars on Friday, despite the market's decline. Hopefully, this marks the sign of some change of direction.

Sincerely,

Mar 18, 2007
Dave Skarica
email: freemarketdave@yahoo.com
website: www.addictedtoprofits.net

Dave Skarica is the editor of www.addictedtoprofits.net, which specialiazes in technical analysis and resource trading.

To sign up for addictedtoprofits.net click here or to sign up to our free e letter please click here.

No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

321gold Ltd