about 2 years ago • 1 min
The put/call ratio (PCR) has always been one of stock traders’ favorite tools for gauging market sentiment and anticipating potential market turns.
That’s because the PCR – which is calculated by dividing the open interest of puts by that of calls – shows whether the market is dominated by put options or by call options. When the PCR is high, the market is cautious. When it’s low, the market is greedy.
But rather than looking at the absolute number, investors should arguably put more emphasis both on how extreme the PCR is relative to its own history, and whether the overall trend is going up or down. After all, data has shown that a relatively extreme number is much more likely to precede a reversal than a less extreme one, while the overall trend has provided a good indication of how market sentiment is evolving.
That brings us to bitcoin: you can see in the chart above that its PCR (orange bars) reached an extreme low in the middle of November, indicating a greedy market and flashing a potential sell signal. But the PCR didn’t come back up even as investors sold off bitcoin, and it’s only recently started to reverse. That suggests the market is again becoming a bit more cautious.
As for what that means – well, this isn’t necessarily a great sign for bitcoin’s short-term outlook. But the market’s return to a more normal range of “greed and fear” arguably plants the seeds for a more robust rally down the line…
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