Stock Market Viewpoint

Stock Market Viewpoint
Reading the Tea Leaves...

Thursday, March 24, 2016

Put / Call Ratio Gives Sell Signal on Stocks

In the market Thursday we had a gap down opening from the weight of the S&P 500's one-year downtrend line I focused on in my previous article.  As we closed Wednesday the king of all market navigators, the equity Put / Call ratio, started to show a sell signal on stocks that confirmed with the trading of Thursday's two 195 minute bars.  

In the chart below, I have the two benchmark moving averages applied that have yielded a 98% accuracy going back many years telling investors when to buy and when to sell stocks.  When the smaller red moving average crosses above the larger green moving average the Put / Call ratio gives a sell signal for stocks and when the red crosses down through the green it gives a buy signal for stocks.

The top chart is where I have marked in each up cross and down cross with vertical lines colored to show the effect on stocks and then continued the line down to the S&P chart below it to show the direct effect on the S&P.

In the six months visible in the upper chart, you can clearly see the equity Put / Call ratio with these large moving averages is an accurate indicator of where the market goes next.  Note that in the past four weeks we have had three moments where the red line almost crossed above the green line (marked with yellow bars) but was turned back down allowing the stocks to continue climbing.  

On Thursday, however, the red line clearly crossed well above the green line for an official Put / Call sell signal on stocks. During the day the Fed's PPT had their market rescue algo running in high gear which dragged the market up a penny at a time to basically flat at the close.  This direct intervention could not pull the red line back down as it continued higher into stock sell signal territory with the afternoon's 195 minute bar.  This Put / Call sell signal on stocks is directly tied to the S&P being rejected by its one-year downtrend line I focused on in my previous article.

Trade well my friends


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