Stock Market for Beginners

The volatility has continued to keep this market on its toes as investors continue to struggle to find direction. The underlying economy still appears sound, but credit concerns have continued to plague the market.

In the following three charts, I’ve annotated the S&P 500, the Volatility Index, and the Put/Call Ratio. You’ll find that the blue arrows all correspond to lows in the S&P. Furthermore, you’ll see that every time the S&P 500 has dipped to the 50 RSI level, the market has had a corresponding low as well.

S&P 500

Volatility Index

In my previous article on volatility, I covered the basics of how high volatility measures the amount of fear present in the market and how that often corresponds with a market low. Take a look at the chart to find that when the volatility hits a local high that the market hits a local low.

Put/Call Ratio

The put/call ratio measures the number of puts (options that are essentially short the market) divided by the number of calls (options that are essentially long the market) to gauge market sentiment. Historically, it has been found that high put/call ratios correspond to market bottoms and that low put/call ratios correspond to market tops. Again, take a look at the chart to find that when the put/call ratio hits a local high that the market hits a local low.

While we may not have yet hit the bottom of this correction, it is very likely that we will soon be heading back up based on previous indicators.

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