Cool as ISSE!
I write this as I am sitting in T.F. Green Airport in Rhode Island after teaching a class in our Boston office and am headed to our office in Singapore to teach next week. (Yes I have a lot of frequent flyer miles!) I realize how fortunate I am, to be a part of the Online Trading Academy family. Not just as an instructor, but as a former student. Yes I did first come across Online Trading Academy as a student back in 1998. I realize that there is truly a major benefit that many students pass up when working on their trading education. That benefit is utilizing the instructors and other students to continue their education. In my classes I always provide my email address (as do all of the instructors), so that students may submit their trading plans and other trading ideas for review from a professional. I am constantly surprised at how few students actually take me (or others) up on that offer.
Online Trading Academy's professional instructors are here to help you realize your full trading potential. USE that resource. Heck, we even created an ongoing mentor service, the Extended Learning Track (XLT) for students. Well you are probably wondering why I am going on about this instead of giving you a "Lesson From the Pros. " I mention this since I was able to meet with Bert Antonik (the Boston Online Trading Academy Instructor) and share ideas about how to properly analyze the markets. One indicator he brought to my attention was actually taught to him by Gabe Velasquez, the ISE Sentiment Index, called the ISSE.
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 ISSE goes a step further and only counts NEW puts and call positions being opened by small investors and traders. It ignores currently open positions to find the current sentiment in real time. The ISSE also filters out institutional positions so the data does not become skewed by hedging positions instead of taking advantage of a potential market move. Remember, an institution buying puts may not be bearish now but wants to protect a major long position or may even sell calls to reduce cost basis.
The majority of "dumb money", small investors, traders, people we know as the herd are usually wrong at major turning points. We can use the ISSE 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 ISSE closes at an extreme level, it usually marks a reversal point in the market. Remember, it may not be immediate but it usually occurs shortly after the extreme unless prevented by Fed actions, major news affecting the market, or acts of terrorism.
In order to read the ISSE, you will go to the International Securities Exchange website at www.ise.com. The ISEE is found by clicking the link on the picture on the home page.
We will look to the middle section which is labeled "All Equities Only".
The low level 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 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? 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 ISSE. You can even get a chart of the index including moving averages.
Notice that I changed the view settings to: All Equities Only. I also highlighted the most recent close below 100 which occurred on August 15th 2007 (Green Circle). What did the market do after that close? Looking at the following chart of the S&P 500 we see that the market put in a short term bottom at that point. The ISSE also closed above 200 on 9/21/07. So where does that leave us now? Well, Monday and Tuesday were down days in the market and we still have not taken out recent highs. We will have to see if a true sell-off is in the works.
I hope you enjoyed learning about this indicator and please contact myself, Gabe, Bert, or 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!
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As a former stockbroker, brokerage trader, and hedge fund trader, Brandon brings various market views and insight to his classes. A wealth of knowledge, he has held NASD securities series 7 and 63 licenses. An Online Trading Academy graduate himself in 1998, Brandon has been trading his own account since. Brandon taught for Online Trading Academy in 1999 to 2001 before becoming a Realtor and Mortgage broker holding licenses in 15 states. Returning to the Online Trading Academy family late 2005, he now balances trading, teaching and a real estate career.