Timing the Correction

One of my main timing tools is the 5 day EMA of the put/call ratio. Unlike the simple put/call ratio, it is most useful for the intermediate term time frame. Here is a chart from the beginning of the bull market in March 2009:

5 day put/call EMA is black, SPX is purple

I drew horizontal lines that represent overbought and oversold levels since March 2009. They are different in bull and bear markets. The big drop (the scale is inverted) in the black series in June 2010 reached a level associated with oversold conditions only in bear markets (other instances not shown on this chart).

Since the EMA has reached the red horizontal line, a correction for the SPX is in order. During the recent bull this worked with accuracy.

For tactical moves, I use the simple put/call ratio:

I said yesterday that I expected the ratio to spike up and then start falling again along with the market. The spike has occurred. For the ones looking to go short, today would be a great time. However, the market is already down as I am writing this and today is Veterans' Day. This is why waiting for tomorrow would be tactically better in my opinion.

In order to go short I would like to see the market closer to 1220. Nevertheless, even if I sell, I will use small size since timing tops in a bull leg is more like a guessing game.