Monday, February 2, 2009

Put / Call Ratio: Top, Not Bottom in Equities

The CBOE Options Total Put/Call Ratio (CPC) has successfully predicted major market turning points in the current high volatility environment. The 20 day EMA (blue) is an especially reliable indicator, picking tops and bottoms on the NYSE Composite (grey area) with great accuracy beyond extreme values of 0.95 and 1.10 (horizontal black lines).

The current level below 0.95 of the CPC is far more indicative of a TOP in equities than a BOTTOM. This makes a break DOWN and OUT on equities the most probable outcome. This would manifest as a collapse below 8000 on the DOW, 800 on the S&P 500, 5500 on the NYSE Composite and 1400 on the NASDAQ Composite.

Smells more like TOP than BOTTOM.

NOTE: This indicator as described here completely falls apart for the period BEFORE 2006. It works until it doesn't. Trade nimble. Trade fast.
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15 comments:

  1. AnonymousFebruary 2, 2009 at 11:09 AM

    Cummon Ben ! "Trade Nimble.Trade Fast". WTF does that mean ??!!!
    I'm not trading at all ATM. It's all too unpredictable. I wish I could trade on the reliability of the indicator !
    I have another very reliable indicator called, "Whatever I do is wrong". Trouble is that's also become unreliable.
    Josh

    ReplyDelete
  2. KostaFebruary 2, 2009 at 12:05 PM

    Thanks Ben, great post. I love your technique and tried it out on my own system. I tend to use the equity-only put/call ratio ($CPCE in StockCharts). I think it's more responsive and more likely to pick out tops and bottoms, but I'm not completely convinced.

    Still, when using your technique with the equity-only put/call ratio ($CPCE), I do not find the same results that you found with $CPC.

    The signal does not indicate that we're topping. It's close, with the moving averages starting to turn up, but it's not quite there.

    I have a chart of $CPCE using your technique here http://special----k.blogspot.com/2009/02/cpce-analysis-is-top-in-is-bottom-in.html

    ReplyDelete
  3. joebhedFebruary 3, 2009 at 11:21 AM

    A collapse BELOW 8000 on the DOW, etc???
    We're ALREADY below 8000, and that's the TOP, so, a collapse to, WHERE?

    My arthur-itis is telling me 6500, maybe 6000, and we will not SEE 8000 again for a while.

    Because, well, you know, it hurts !

    ReplyDelete
  4. UnknownFebruary 4, 2009 at 7:38 PM

    Thanks Ben.

    I'm sure you have seen this CXOAG analysis that concludes essentially no predictive information in the CPC:

    http://www.cxoadvisory.com/blog/internal/blog5-08-07/

    ReplyDelete
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