Using the 5 Day Moving Average of the Put to Call Ratio to time a bottom in the  the S&P 500

Most investors look at the Put to Call Ratio on a daily timeframe however there is a lot of day to day volatility using this method.  To lessen the amount of daily volatility using a 5 Day Moving Average of the Put to Call Ratio gives a better idea of overbought and oversold conditions in the S&P 500.

The chart below is a plot of the 5 Day Moving Average of the Put to Call Ratio (red line) versus the S&P 500 (blue line) since early 2002.  Generally when I see the 5 Day Moving Average of the Put to Call Ratio rise above 1.0 (points A) this is a signal to me that an upside reversal (points B to C) may develop over the next few weeks as the S&P 500 has become oversold.  

The most recent signal occurred in mid October as the 5 Day Moving Average of the Put to Call Ratio rose well above 1.0 (point D) and has been followed by a 7% rally in the S&P 500 (points E to F) from mid October through mid November.

Thus keeping track of the 5 Day Moving Average of the Put to Call Ratio can give investors a clue to when the market may be getting close to a bottom and possible upside reversal. 

Click Here to Signup for a Free 2 Week Trial Membership to Amateur-Investors.Com
and see which Stocks to Buy or Short in the Weeks ahead

 

Enter your Email Address below to receive our "Free" Weekly Market Newsletter

Other Helpful Investing Articles