The SPY put-call ratio closed at 1.67 on Friday, well below its 20 dma. So traders like you and me and everyone else reading this are apparently feeling confident that the bottom is in.
Yet SPY put volume fell by only 6% today on another strong rise in open interest. That means both bulls and bears dug in some more, with nobody backing down. The ratio dropped because of a 22% increase in SPY call volume.
Meanwhile, the big stacks pushed the CBOE index put-call ratio up through its top Bollinger Band to 1.70. What has them so scared?
The last time the CPCI was this high was on May 30, 2013, as the dip to the June 24 low was getting going. Recent dates when the CPCI has broken its top Bollinger Band while the SPY put-call ratio fell a comparable amount to today were July 24, 2014, August 29, 2014, and September 30, 2014.
The soaring CPCI occurred on a day when SPY established a new price channel that would usually put in at least one more wave up before starting a sideways move, and could climb up the channel a long way, or even break out into a steeper channel on the next wave up for a melt-up.
And ES has drawn another potential rising wedge (navy blue on chart below) that would require at least another wave up and then likely some kind of sideways move that would probably climb higher still (green scenario on chart). But the CPCI suggests that something different is about to happen (such as the purple scenario on chart).
What this means to me is that we should take any downward breakout from the new SPY price channel or ES potential rising wedge very seriously. It would be a set-up to exit longs and return to short. It would likely mean a failed right shoulder and downward breakout from the inverse head and shoulders patterns on both charts, and those usually make for strong moves.
Failed bottoming patterns are characteristic of melt-downs.