Weekly Update: PC > 1 = BUY THE DIP
Good evening, and welcome to this week’s edition of Stealth Trades!
Ever heard of the put/call ratio?
It is a powerful signal – one you can use to buy dips in the market during periods of short-term panic.
Simply put, it measures whether traders are making more bullish or bearish bets.
The easiest way to bet on a near-term move higher or lower in the stock market is buying stock options. Call options are a bet that prices will soon be higher. Puts are a bet they will be lower.
The put/call ratio, which can be plotted on TradingView with the symbol “PC,” gives net reading.
A number ABOVE 1.0 means traders are buying more puts than calls. Market participants are extremely bearish and betting on a near-term crash.
One might think this would be the time to SELL stocks. But here’s what you have to remember…
The average trader stinks.
They panic and sell at the bottom. They chase trends and buy hot stocks at the highs. Following the herd is a good way to lose a lot of money.
Instead, you want to do the opposite. When traders start panicking and load up on put options, that is usually the best time to buy.
Take a look at this chart (again, you can recreate this easily in TradingView)…
On top is the S&P 500 index.
Below is the put/call ratio (ticker symbol PC). I have added a solid white line at the 1.00 reading I mentioned earlier.
Notice how each time the put/call ratio reached 1.00 it marked a low in the market. I marked the S&P chart with a white arrow at each occurrence.
These were great opportunities to buy the dip.
Even in the 2022 bear market, when stock prices fell for nearly a year, the put/call ratio identified turning points for short-term rallies higher.
In the chart below which covers the 2022 bear market period, I have added a 10-day simple moving average in yellow.
This helps to “smooth out” the ratio during times of higher volatility like we experienced then.
Waiting for the moving average to hit that 1.00 put/call ratio pinpointed the best buying opportunities, even in a terrible market.
This indicator is looking for extremes. It spots periods of exaggerated bearishness when traders are overreacting to some recent event.
Traders are people. They are emotional. They overreact.
Our job is to remain rational.
Obviously, that is easier said than done. That is why tools like the put/call ratio are so valuable.
If you want to add this chart layout to your TradingView suite, here’s how to do it.
Click here to open the chart in a web browser.
Click ‘Copy’ in the top right corner of your screen. If you are not logged in to TradingView, you will be prompted to do so.
Then save the chart as a layout and name it “Put/Call Ratio” (or whatever you like).
You can then access it any time by selecting ‘Load layout’ and choosing “Put/Call Ratio.”
Best wishes for your trading,
