Constructing a put-call ratio cycle indicator

A sentiment series built in layers

The construction starts from a raw equity put-call series and first clips values to the band 0.45 to 0.90 to limit the effect of rare extremes. After that clip, the series is the put-call-ratio: a clipped equity put-to-call volume series used as a sentiment input for regime context.

Editorial reading: TradersWeek presents the later smoothing, oscillator, and cycle layers as the point at which a single option-flow reading becomes a regime map rather than a raw ratio.

The first exponential smooth

The first smooth is a short-delay triple exponential moving average, with a five-day length as the stated default. That step opens the exponential-smoothing stack used to form the fast and slow series.

The rainbow-average

A second smooth stacks ten successive two-period weighted averages on the triple-exponential series and divides the sum by ten. That chain is the rainbow-average: successive two-period weighted averages applied after the first exponential smooth.

How fast-Pcri is formed

The fast constructed indicator is a five-period relative-strength transform of that rainbow-average, then a five-period weighted moving average of the oscillator. The result is fast-Pcri, the short-horizon version of the constructed indicator for near-term cycle-phase reading. Pcri is the constructed put-call ratio indicator obtained after clipping, smoothing, and oscillator transformation.

High and low reference lines are placed at 1.3 standard deviations of the constructed series over 200 days, with a midline at 50.

Reading two horizons on the cycle map

The dual-horizon overlay is built so a short-term view and a medium-term view can be read together against the six price-cycle phases. Slow-Pcri is the medium-horizon version of the constructed indicator overlaid on the fast series. The dominant-cycle is the six-phase price-cycle map that the constructed indicator is designed to mark.

In the worked example, phase 3 continues an index advance while the constructed series still declines. Phase 4 is a warning upturn in the series while price is still rising. Phase 5 confirms when the index itself turns down.

Confirming slow-series extremes

Tops and bottoms on the slow series are treated as confirmed when an inverse-Fisher-transform of that series reaches the 100 or zero bound. The inverse-Fisher-transform is the bounded confirmation transform used to mark those slow-series extremes as top or bottom.