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Posted on 13 April 2011 | 4,495 views

December 2011 SPDR Signaling Crash

Options trading activity can yield very valuable clues in this regard, and one of the most reliable indicators for 2011 I’ve found is the put-call ratio, a useful, sentiment-based, technical indicator.

The standard put-call ratio is simply the volume of all put options that traded on a given day divided by the volume of call options that traded on that day. The ratio can be calculated for an individual stock, index, or futures underlying contract, or can be aggregated.

The back door shows 122k contracts purchased on the December 95.00 and 73k contracts on the December 80.00 (Symbol:SPDR) put options. Large institutional traders are making bearish bets and they’re looking for a “1987 Stock Market Crash” type move based on the money currently traded at the 100.00, 105.00 & 110.00 strike price. You don’t see this kind of volume traded unless there is a huge move around the corner. Once the shorts are squeezed out of these markets there is one big drop coming on the S&P 500 and that markets are going down.

Here are the three main things you need to learn to trade stock market crashes …

1: Never confuse brains for a bull market and learn to play both sides of the market. In the years leading into the 1987 Crash, it was a one-way street on the upside and the rising tide lifted almost all the boats but when it came to an end, the 1987 Crash was a wake up call. Money can be made on the downside, and sometimes a lot faster but be flexible enough to play both the up and down moves.

2: Never enter any trade without an “Exit Strategy” which should be a stop-loss order, or at worst a mental stop that you will obey and never let a winning stock trade turn into a loser.

3: Never be complacent, thinking the market must do what your analysis says it should do. The market can do whatever it likes, it doesn’t care what you or I think it should do. When the market doesn’t act in accordance with your work and you are in a trade, close it out and take a fresh look. It will save you money and aggravation, and set you free to go on to the next trade.

There are so many things pointing to a sharp sell-off in the very near-term future, it’s amazing. The only thing — the very last signal I need to see before becoming an aggressive bear — is a weakening of the internal market.

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