When looking for equities to trade, I want to find the cleanest trading patterns. This applies to all the multiple time frames traded. Recently, the cleanest pattern for the market has been the 60-minute chart.

If you look at the daily chart of QLD, you can’t find a decent trading pattern in the last week.

Now look at the 60-minute chart for QLD. Buy signal 1 came after a gap higher followed by 3 bars down. Five bars up and it’s time to sell at point 2. Those fibonacci numbers are doing their thing. Five bars down leads to a gap down the next morning. The bottoming tail, higher high and lower low signal another buy at point 3. The stock stalls 5 bars up at recent resistance. The first news on BSC hits and we see the market tank. If you’re ignoring the news, and just watching the chart, you see it still trades range bound. Not so scary. The gap lower yesterday is followed by a higher high buy signal at point 4. Combine that with a bullish VIX reading and a high p/c ratio. Seven bars up into the fed announcement calls for another sell. A bottoming tail with volume takes the ETF back to it’s 200 ma.

Look at the buy signal and trend change on the 5-minute chart yesterday.

The levels of pessimism out there right now are a positive for the bulls. I’ve said that building a bottom is a process. Two indicators I watch for sentiment include the VIX - CBOE Volatility index and the equity p/c ratio. Watching them for extremes gives some insight to the bottoming process.

With this shocking news (BSC avoids bankruptcy by selling itself to JPM for under $300 million, when it’s stock price showed a value around $30 billion a few weeks ago!) out of BSC - Bear Stearns, the VIX spiked to 35.6. It reached 37.57 during the panic lows in January of 2008, and 37.5 in August of 2007. A chart is a chart, and this could end up being a double top for the VIX chart.

If you look back on the VIX a few years, the VIX reached as high as 45 during the strong selloffs of 2002.

The other indicator I watch for sentiment is the equity put/call ratio. I like to use the equity figures alone. You’ll get skewed numbers sometimes when the index figures are included.

The ratio has been over 1 lately. I’ve read an interpretation of the number, that says over .80 can indicate market bottoms. So when you get to 1.3 on the equity p/c it’s reaching a turning point. The longer it stays that way during the day, the better it is for the chances of a turn.

As with any market indicators, these are two tools to help traverse your way through the market, and should be used in combination with others in your trading arsenal.