A slew of economic reports prior to the market open failed to inspire traders prior to the beginning of March Madness. There are a few traders who continue to believe this market is “mad” because of the move off the low. Regardless of your opinion today’s session was a dull one with light volume the market was quite boring. Boring days are quite normal and welcomed in the market as we need to rest and digest gains. Volume was lower across the board showing sellers simply couldn’t muster any pressure on the downside. The late day rally shows price action continues to be strong and supports higher prices.
Quadruple witching Friday is tomorrow and it is surely to bring in volume as it usual does. It’ll be interesting to see how the market digests the movement from option buying and selling. Today’s put/call ratio ended at .77 suggesting sellers haven’t gotten too complacent. A reading below .60 would signal complacent sellers translating into a signal the market is nearing an end to the current uptrend. Remember, it is only an indication and not the rule. Market leaders along with index action will be the real “tell.” The put/call ratio is a secondary indication to price and volume action of leaders and the market.
Why follow the put/call ratio if it is secondary? It will often confirm what you are seeing with the market leaders and can often point to “extreme” levels. Although it may appear we are at extreme levels if you pay attention to the noise spewing from CNBC, but we are far from it. Without any major distribution and leaders rolling over in heavy volume it is very hard for us to point out a top just yet. Many market pundits have been trying to short or buy puts to catch a top and it simply hasn’t worked. Avoid the noise and simply follow the leaders.
There are plenty of oscillators and indicators indicating we are overbought, but in trending markets these indicators will fail. We have a very strong trend, not the strongest we’ve seen, but strong nonetheless. But, many of these indicators are showing we are overbought. Remember, these indicators can and will remain overbought for a very long time. Use these at your own risk as they aren’t 100% and you’ll find that no indicator is EVER 100%.
Since no indicator is ever 100%, even strong breakouts can fail is why we cut our losses. We think of our cut loss strategy as an insurance policy for protecting our trading capital. Limiting losses and riding winners will keep ourselves in the game.
Enjoy quadruple witching Friday and without any major economic news in the morning, it’ll be very interesting to see how the market action will unfold.
Be well
I actually tend to put a lot of reliance on the put/call ratio. More than what you suggest above, at least. I believe that examining the ebbs and flows of this ratio is one of the better signs of “strength” in the marketplace. I agree with your point about it being an indicator of “extreme action” as well… that point is right on.
We value price and volume action above all else, but put/call is a useful tool.
Thank you for your comment!