When we endure a lengthy bear market, many technical buy signals can be thrown right out the window. They don’t work as pessimism and outright fear take over the market. Instead, you have to be prepared for reversals based on extreme sentiment readings. Historically, Volatility Index ($VIX) readings in the 30-40 range have produced key market bottoms – at least in the short-term. But my favorite is the 5-day moving average of the equity-only put-call ratio ($CPCE). Every significant bottom this century has occurred with this 5-day moving average hitting AT LEAST .75. Nearly every one has seen this 5-day moving average hit .80. We were at .82 on the mid-June market bottom and we’re back near .80 now. Check this out:
Each time in 2022 that we’ve seen the 5-day moving average of the equity-only put-call ratio move above .75, we’ve seen at least a short-term rally in U.S. equities.
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Tom Bowley is the Chief Market Strategist of EarningsBeats.com, a company providing a research and educational platform for both investment professionals and individual investors. Tom writes a comprehensive Daily Market Report (DMR), providing guidance to EB.com members every day that the stock market is open. Tom has contributed technical expertise here at StockCharts.com since 2006 and has a fundamental background in public accounting as well, blending a unique skill set to approach the U.S. stock market.