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Thursday, June 18, 2009

Put / Call Ratio: Spiking

FN: During extended period of Bullish sentiment, the Put/Call ratio drop significantly and stayed low... with the 20 and 50 period EMAs (blue and red lines) sliding well down to 0.85. When these shorter EMAs move up thru the 200 day EMA (green line) after a prolonged stay below, a trend change in equities is foreshadowed.

During this massive Bear market rally, the Put/Call ratio dropped to significantly and stayed there. It has now pushed decidedly higher and is that much closer to signaling a trend change. The top equities is in.


Kosta said...

While the put/call ratio is an intriguing signal, I believe you are reading a bit too much into the data. In particular, I don't think the put/call ratio, or at least peaks and troughs in the put/call ratio, has been a reliable trading signal for many months.

Your basic argument is that the put/call ratio is putting in a new high, and that these highs correlate with new lows in the stock market. So you argue that there is a top in equities.

The problem with this argument is that the put/call ratio has not correlated with the stock market in this fashion for at least 8 months. From last October until last March, the put/call ratio put in a series of lower highs and lower lows, while the stock market put in a series of lower lows. If the last 8 months is any guide, we'd be looking for a lower high in the put/call ratio to signify that we're going to get a lower low in equities.

I'm not sure I'd buy that last argument either. Instead, I think the put/call ratio is an unreliable indicator at this juncture.

Ben Bittrolff said...


I'm looking at CPC using the three EMAs to smooth it. I'm using it as an oscillator, with 0.85 and 1.10 being the lower and higher bounds. I'm saying that if CPC gets out to those extremes and starts to move back, the market will reverse. It works. Adjustments for time lags need to be made for sure.

Also, I use this as a risk/reward measure. For example, going into a new long trade with CPC below 0.85 (the 20 and 50 day EMAs) means your buying into what is probably closer to a top than a bottom and the risk of a correction is higher.

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