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Put/Call Ratio Oscillator To Pinpoint Market Conditions by John Summa

A Put/Call Ratio Oscillator To Pinpoint Market Conditions by John Summa Who says the put/call ratio doesn't work anymore? Here's an oscillator that's great for pinpointing intermediate market tops and bottoms. What's the ideal time to write an option? The ideal time to write a deep out-of-the-money   (DOTM) put or call options credit spread? While charts may tell you when to exit such a position, the correct use of put/call ratios offer an excellent way of determining just when to enter your trade. Here's one approach to interpreting equity-only put/call ratios, combined with my own volume-weighted, put/call ratio oscillator for finding just when to write your DOTM spreads for maximum probability of success. During any intermediate bull or bear trend, investor moods tend to remain slanted in one direction or the other - hopeful or worried, driven by greed on one hand and fear on the other. When either sentiment becomes too prevalent, contrarian analysis suggests that the trend is ready for a change. This is based on the view long held by technicians that the majority of the investing public is usually wrong just when everything seems right. Historical data confirms that it is indeed possible to construct parameters that indicate when the crowd has gone too far toward one extreme or the other,where condi- tions are thus ripe for a reversal. Market professionals and insiders, therefore, often attempt to trade crowd psychology in the opposite direction, often referred to as contrarian technical analysis. Indeed, put/call ratios have been, and remain, very effective contrarian sen- timent tools, particularly since the public's speculative use of options has exploded with the online investing revolution.

by John Summa