Put/Call Ratio Measures Stock Market Sentiment


Simpler Trading Team

Aug 29th 2022  .  5 min read

In this article:

  • Key ratio identifies market moves
  • Summer squeeze circles back into play
  • Traders track gold for buy opportunities

Heavy selling to close last week and more weakness across the market may be the wake up call traders need to prepare for fall.

An informal, Simpler Trading chat room poll showed 70% of the trading community believes the S&P 500 will make new lows before Dec. 31, while 30% said no.

Continued selling on Monday, despite all three major indexes mounting mid-session rallies, supports the majority opinion moving forward.

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Put/call ratio measures market mood

One of the key indicators lending credibility to the argument for more lows ahead is the put/call ratio.

The put/call ratio divides the total traded put options by the number of total traded call options for an index or individual stock. The put/call ratio helps measure market sentiment, i.e. whether traders are buying more call options in a bullish trend or buying more put calls in a bearish trend.

Henry Gambell, Senior Managing Director of Options Trading at Simpler Trading, has been closely following market turmoil through the summer. He patterns market movement through use of a variety of market indicators, including Fibonacci levels and Voodoo Lines®.

Add in the put-call ratio and Henry believes traders have a higher probability of determining spots to step in and buy in a market with recent gaps down. The put-call ratio spiked to 1.41 on Friday and closed at .93 on Monday.

With continued selling to start the week, the put-call ratio signaled more market participants buying puts than calls.

“That’s usually how the market will work to find a bottom,” Henry said. “You have this big, scary open (Friday). Everyone comes in and gets short, and that helps put in the low.”

Whichever side traders are on in this market, if a bullish advance is to hold into the end of year, key support levels must come into play. Those levels will be a focus of Simpler’s traders after continued selling today.

After opening down heavily, the three major indexes managed enough of a rally to recover early session losses.

In the market today, the Dow closed at 32,098.99 points to fall .57 % (dropping 184.41 points on the day). The Nasdaq dropped to 12,017.67 points for a 1.02% tumble while the S&P 500 stumbled .67% to 4,030.61 points.

Summer squeeze circles back into play

Summer squeeze circles back into play

A squeeze consolidation that began formulating in the S&P 500 is back in play as the market continues to struggle.

Jack Roberts, Director of Options Strategies & Micro-Futures at Simpler Trading, is intently watching Fibonacci levels and Voodoo Lines® showing confirmation of a squeeze cycle that started in July. The signal has circled back on the charts, and is showing the possibility of more downside movement in the S&P 500 toward 3,900.

That could be a rough ride lower.

The heavy selling Friday left the S&P 500 down 1% before the open on Monday with the Nasdaq also down almost 2%.

“This big down day in the market (Friday) tells me we might be looking at a situation similar to ‘crossing the Rubicon’ – going too far to an extent to where there is no turning around until we get to a lower low,” Jack said. “In this case, 3,950 – doable.”

He is focused on the rest of the week that could continue big selling sessions with more economic data releases. These include job openings, labor turnover, consumer confidence, national employment, and nonfarm payroll data.

Jack plans to stay focused on the S&P 500 (ES) and commodities as this summer “circling” plays out this week.

Gold (GC) is of particular interest this week.

Gold hit a recent new low on Friday and Jack anticipates it could move lower. If the S&P keeps falling, Jack doesn’t rule out GC moving lower toward $1,700. Gold closed at $1,737.37 on Monday, up just .03%.

“Gold is a heartbreaker,” Jack said. “There is not really a true, perfect setup on gold right now. It all makes sense to go lower. It’s definitely something I’m hurrying up to wait to buy.”

Simpler’s traders are also keeping an eye on the U.S. Dollar (DXY) which has held strong recently, even reaching a new high for the year. DXY closed at $108.78 on Monday, down just .02%.

Based on market signals and S&P movement, Jack wouldn’t be surprised, with continued selling, if the dollar pushes toward $113.

With heavy selling in play the last two sessions, Jack anticipated the market could settle into a “quieter” level of activity Wednesday and Thursday, as has been the recent cycle.

Volatile trader’s market turns into opportunity

For some the big move down Friday and more selling Monday may not have been promising.

For Simpler’s traders, the volatility turns into opportunity – a trader’s market.

Economic data releases are worthy of traders’ attention this week as the market works through the increased selling.