Traders Question Stock Market ‘Sentiment’


Simpler Trading Team

Nov 18th 2022  .  4 min read

As this market constantly shifts with each session, Simpler’s traders are getting “sentimental” about how to start each trading day.

Each opening bell brings more challenges, often sparked by the latest news event that sparks a stock market reaction.

How market participants “feel about” what is happening tends to guide their trading decisions. A gauge of this sentiment can help traders focus their daily trading plan.

Options with Kody Ashmore
Futures with Neil Yeager
Fibonacci & Voodoo with David Starr

Traders question market ‘sentiment’ for direction

“What kind of market are we in today?”

This question is on the mind of retail traders as soon as the opening bell sounds. What is important is to understand what other traders believe is the answer to that question.

Cue the put/call ratio before the day begins.

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, turns to the put/call ratio when he sees a defined move in futures trading prior to the daily open session. This helps him assess what may be coming – what direction the market may move.

“There are always so many ways that this can play out,” Henry said. “I think that is one pattern worth paying attention to.”

Follow key levels for put/call ratio

So how do traders read the put/call ratio?

Put/call ratio patterns are available through online trading platforms or separate subscription services.

Henry shared how the put/call ratio can reveal an emotional, or “sentimental,” reaction to any news or event affecting the stock market. Traders react and the put/call ratio picks up on the uptick in buying or selling caused by this market movement.

Here are some put/call ratio general guides:

  • Below .45 indicates severely negative
  • Between .45 and .65 indicates negative, yet not extremely negative
  • Between .65 and .75 indicates slightly negative
  • Between .70 and .85 is considered neutral, indicating market action and price on the Dow and S&P can go up or down equally as easy
  • Between .85 and .95 indicates bullish, but moderate
  • Above 1.0 indicates extremely bullish and a point where traders look for trades on the long side

Extreme values – very low or very high – are important signals when identifying “sentiment” in the stock market. This internal indicator helps Simpler’s traders discover market moves.

No one indicator replaces analytical research and developing technical skills when making informed trading decisions.

Simpler’s team of traders always layer in various signals and indicators to create a broader view of market momentum. These include a variety of tools and indicators, such as Fibonacci levels and Voodoo Lines®, and the Volatility Index (VIX).

The team also focuses on key equities, such as Tesla, Inc. (TSLA) and Apple, Inc. (AAPL), that are considered leads indicating overall market direction. These and the S&P 500 (SPX) have been some of the best places to dedicate focus of trades due to plenty of liquidity, according to Henry.

Get back to basics daily for trade setups

Henry also hasn’t forgotten how he “grew up” in the trading world.

At his fingertips within each trade decision is how an index or stock price sits in relation to its average true range (ATR), or mean price level.

As Simpler’s traders know well, every ticker will at some point “revert to the mean” – move back toward the 21-day exponential moving average.

How do you play this erratic stock market when price across the board is 2-3 ATR away from the mean? Reversion to the mean takes time, whether watching a 5-minute chart or a monthly chart.

Henry offered the example of the U.S. Dollar Index (DXY) which is in a quarterly squeeze that is “fresh into its firing” on the charts. The squeeze fired this quarter, and Henry considers DXY as one of the strongest markets across the board right now.

“So if squeezes are going to tend to last five to eight bars (on the chart), then that would tell us that the dollar has the potential to be bullish into the end of next year,” Henry said.

Analyzing the squeeze is part of the layer of technical analysis signals that Simpler’s traders constantly watch.

Other squeezes Henry is following right now include Occidental Petroleum Corp. (OXY) and Johnson & Johnson (JNJ).

Simpler’s traders are expecting a hectic next week with the short holiday stock market schedule. Follow the team as they work through the holidays.