Thursday, February 13, 2014

Total Put/Call Ratio Analysis and What it Means For Stocks

put/call volume and moving averages
Click on Chart to Enlarge

This chart above show the raw daily total put/call volume ratio with some moving averages and an oscillator type set-up in the bottom pane.  What is easily recognizable is that the oscillator levels have poked up to extreme levels relative to the trend for the last few years.  This indicates that we should expect a bottom in prices to be placed here if the trend is to continue in similar fashion.  Now referencing the chart of the S&P 500 below, look at each time the put/call oscillator rose above the green line and compare those times to the price action of the S&P.

Prices Remain in Uptrend
Click on Chart to Enlarge

We can see that repeatedly when we have seen the fear -as evidenced by increased relative put volume- move to similar levels as we did last week, prices have stabilized and moved higher.  Now it appears that the put/call volume oscillator has time and room to fall again before an potential complacent sentiment is obviously developing.  I would suggest that we expect to see yet higher highs in stock indexes from this point.  An obvious stop loss point could be below last week's low.

Now in addition to the sentiment analysis, any analysis or expectation of price action should be based on past history of price and time data.  And going back to the Oct 2011 low, the largest rallies within corrective phases of price action have been ~3%, 4%, 4%, and 5% lasting from ~5 trading days to ~15 trading days.  So with each day that passes, and an already nearly 5% thrust in 5 days off last week's low, it seems to be reasonable to believe that a corrective low has occurred already and a new uptrend or range will develop.  In other words it would be out of character for the established trend to move any higher and then fail to make new bull market highs before falling below last week's low.

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