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Put To Call Ratio Divergence: Market Top? Is Market Crashing Soon?

Jan 09, 2021
 

Okay guys, this is Brandon from 13 market moves and we are going to be doing current market analysis. And I think we are near the top of the market. And to that, for that, we're going to be looking at, put, to call versus SPX, which is a proprietary thing that I look at with a good deal of success in the past in, um, kind of alerting us to where the market is as the market topping or bottoming. And, um, this is a significant analysis and I wanted to kind of go over to make that case so that it can help everybody with their trading. And I'm in this confusing market. Uh, we are, I'm here to tell you we are near the market top right now. Okay. So put to call ratio versus SPX at critical levels. Okay. So let's get into it. It's a really short video, but we want to really make sure that everybody understands what we're looking at now, first and foremost, um, what we want to do is understand that put to call ratio is just the ratio of, um, you know, put, to call buying.

If people are buying a lot of calls because they're bullish, then the numbers are going to be lower. The ratio will be lower. And if people are buying a lot of puts to for protection, or they think the market's crashing, or, you know, people are scared, then they're going to be buying more puts and that number is going to be higher. Okay. So, um, in this proprietary, um, chart that I use, basically what we denote the SPX or the S basically S and P 500, is this green line right here. Okay. And this red and black line denotes the, uh, basically the equity put to call ratio. And I combine these to kind of get an idea of where we are in terms of the market breadth. Okay. So, uh, one of the things is that I want to start with 2017 and move our way down to the 2020.

But before we do that, I want to make sure I'm going over the current situation. You can easily see that S and P 500 is near the top, and it's forming a topping pattern. Doesn't mean he can't go a little bit higher, you know, and then start doing this. But when you look at the fact that we had 0.35, which is probably one of the lowest put to core ratios that I've seen in a long time, and we've been through pretty bullish market conditions since the, uh, financial crisis ended in 2010. Now, what we want to look at is this distance between our put to call ratio denoted by this red graph right here, and the green graph right here. And that is a divergence, okay. That is basically flashing all kinds of warning signs at this point. The fact that we had 0.35 on the put to call ratio means that we have irrational exuberance at this point.

And market is imminently, maybe within the next two weeks, maybe a month from now, maybe this week, um, be setting in a topping pattern. And the subsequent action will most likely be a sharp corrective action. Like we saw in February to March right here. Okay. We also saw this action happening between, towards the end of August and September all the way through December 23rd of 2018. And we also saw this pattern play out right near the, uh, December leading into 2017 to 2018. Okay. So I just wanted to point that out and why I'm concerned and why I'm, um, getting, um, fairly bearish at this point. And we need to be on guard. It doesn't mean the market. Can't be, um, more bullish at this point, but realistically we are near that point and I'm going to make that case for you. So right now we have hit the 0.35 a little while back in the December few days ago.

And basically what we are looking at by the circles that we're looking at is basically a topping pattern. And the fact that there's this distance I'm repeating myself, but I need, I need to drive this point. Home basically means that this is a dislocation and a divergence. Okay. It means that, um, we have to be on guard because we have a sharp sell off a corrective phase coming. So let's go back now, the, um, basically from, um, end of October, into leading into February to March, um, crash that occurred from this point on, we started to make lower lows into, um, our put to call ratio started to decline as the S and P 500 climbed again, look at this divergence, this breath, okay. They're basically diverging away from each other. Okay. That is a very bearish fine. And so basically, as it got into January of this year, in 2020, it seemed like the market was just going to go straight up until we had that inflection point.

We hit the lows of the, a put to call ratio. And, and at that point it was 0.45 0.45 right here. And then it started to put in the topping pattern. Okay. So we have one or two, and we're basically beginning to top as we go. And now, as this put to call ratio hits the bottom, the net rebound formation is that people are going to start buying protection because they know the market is getting a lot of copy. And that's exactly what happened into March. And then we know what happened from here all the way down to here was a very corrective phase. And then we hit a very high put to call ratio at that point. Okay, let's go back into, um, August to October month leading up into this, um, corrective phase. Again, there's a slight divergence, you know, and we started hitting these lower put to call ratios and eventually yielded into a pretty decent leading into 2018.

These levels where basically we had a correction. And basically when we get this skewed higher put to call ratio, we need the bottom. When sin let's go back to 2017, same thing happened here. As we started to get lower and lower into our put-call ratio, you know, somewhere important, four seven, 2.0 0.45. And this divergence that's present here led to a pretty decent, um, corrective phase. So what am I talking about here? What I'm saying is we are in a unprecedented levels of euphoria that you rationally root exuberance that exists in the markets today. When we hit this level of 0.35, that's far lower, and we're making lower lows on all of our put to call ratio. This is pretty much the top. It doesn't mean that it can't keep going up, but we are at that point, when this thing breaks, we are going to have a mother of all corrective phases, maybe even rivaling similar to what we saw in February to March.

Okay. And so we need to be on guard. So one of the things that I'm talking about here is that the critical level put to call ratio was reached at 0.35. That's this level right here. Okay. Lowest level on record, at least for the last five to 10 years. Okay. Currently it has bounced at 0.42, and we're kind of seeing a, maybe a little bit of corrective phase. I wouldn't be surprised if it bounced a little bit and then roll over into the year end. And what, by this analysis, we think that maybe the corrective phase will come sooner than later, maybe an outside chance of this happening before the year is over. But certainly within the first two weeks of January is what I'm thinking. This cannot continue. This type of a divergence can not continue, um, without any prolonged consequences. And so we should be getting a pretty significant correct to face.

So be on guard with that. Um, the historical analog that we're looking at for me, indicates that we're within at least two weeks or shorter of a major market top and, and the corrective phase will ensue. Okay, now I am anticipating a sell-off and, um, it may be this week and we have quadruple witching that's coming up. We're going to get some price volatility along with the fact that because this market has been so irrationally bullish, and it's just been grinding up higher and higher. Okay. And B basically there's, it seems like there's no more bears left at this point. And this is exactly the time that you got to wake up and start to look at these objectively, so that at least in your arsenal, you know, that, um, we're near the top or at the top of the market. Okay. Notice the lower lows from 2018, 2019.

And of course, 2017 and 2020 October to December. Okay. Here's doc Tobar to December. And here's the October to December in, um, um, leading into 2018. Everybody remembers this 2018 correction. Everyone thought the world was ending down to here. It bottomed in December 23rd, 2000 18,000 fund. Right. Right. And then leading up into this year again, I'm repeating myself. Okay. Leading into 2020, we have put in the lower lows for that time. And then shortly thereafter, um, towards the beginning of February or the second week of February, we started to have this sharp crash kid. This was a definitely a crash. We think that same thing's going to happen here. We probably are getting a repeat of 2000, 19, mid to end of January to early February in 2021. Okay. Early February to January, look out for a sharp, profitable, um, shorting opportunity. Okay. So that's what I wanted to go over this put to call ratio. We are, I mean, this is insane, incredible. This divergence that's formed right here. See this right here compared to last year, it's even bigger. Okay. So, um, if you have any questions about this, click, the link below, schedule a 20 minute consultation with our senior traders. If you want to learn what the heck we're talking about, but for those of you that knows what I'm talking about beyond garden, I think a sharp sell off is just right around the corner.

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