No indicator works all the time in predicting stock market corrections. But some work better than others, and this obscure indicator from Yong Pan at www.cobrasmarketview.com has a high percentage success rate. The indicator is the Percentage Price Oscillator (PPO) of the relative movement of the equal-weighted S&P500 index (normally the S&P 500 index is a market-capitalization weighted average) versus the Chicago Board Options Exchange (CBOE) options equity put/call ratio.
In the chart above, when the blue indicator line crosses below the zero boundary, a sell signal is generated.
Intuitively, the indicator makes sense. First of all, the put/call ratio serves as a reasonable real-time measure of complacency and fear in the market. When investors are fearful, they load up on put options for protection, sending the put/call ratio higher, and when they are complacent, they buy less puts and the put/call ratio drops. The indicator line displays the PPO (a measure similar to the rate of change) of the relative movement of the equal-weighted S&P 500 index (the numerator) and the put/call ratio (denominator). When the market begins a new downtrend, the numerator falls and the denominator rises, so the PPO heads down. The interesting point is that the indicator has worked for a long time through various market environments. The data I have starts in 2004, so it has worked for at least eight years.