The two best indicators to follow for the market are price action and volume. I often refer to them as the king and queen of the indicators. Other indicators can offer a glimpse of what is happening under the market surface, giving us a heads up to big moves that are brewing. The two that are most reliable for understanding future price action are the put/call ratio and the McClellan oscillator, which shows breadth readings.
For future price action, turn to these indicators
The put/call ratio provides a raw look of where traders are placing their money bets in the market. While it’s great to know that, yes, they are buying puts, or it look like everyone is loading up on this one name, what is often lost is the timeframe. Maybe those puts were a routine purchase to protect portfolios. Perhaps traders are seeing some heavy downside ahead. They could be wrong, but if the volume is high, it’s likely there is high conviction in those purchases. The put/call ratio is often a good indicator that that the trend is about to shift direction.
The McClellan oscillator (MCO) show a different view of the market – breadth. Breadth is extremely important and often cumulative. The MCO shows the amount of issues gaining vs retreating on a trending basis. It also shows strong shifts in sentiment in the indexes, which are called breadth thrusts. This oscillator has been around for some 50 years and quite often tells us when the market is at extremes. Overbought levels should be sold, while oversold levels should be bought aggressively.
What the indicators are telling us now
Recently the put/call ratio and MCO were flashing huge red warning signals. Meanwhile, the indices were at or near record highs. The indicators were saying the market should be coming down, but unfortunately they don’t provide timeframes. However, if you heeded the warnings, which had been flashing since early July, you might have saved yourself from losses that accumulated between July 15-19. The indices lost 2-3% in just a few short days.
Like I said above, price action is always the most important indicator to follow. When supporting indicators are not in sync, something is amiss and bound to crack. This time it was the market. It only lasted a few days, but it was enough to give everyone the shivers.