The calculation for the SOPR is:
realised spent value of an output (in USD) / value at creation of output (in USD)
If the SOPR is greater than one then it tells us that, on average, people are selling at a profit. On the other hand, if the SOPR is less than one, then it tells us that the average person is selling bitcoin at a loss.
The SPOR can be useful in predicting price movements and usually oscillates around the value of 1. In a bull market, when the SPOR falls below 1 as the market corrects rising prices and people are mostly unwilling to sell at a slight loss - since this behaviour acts to suppress available supply, in turn putting upward pressure on the price. Therefore, when the SOPR dips below 1 in bull markets, it identifies a good buying opportunity.
However, in a bear market when the SOPR rises above 1, some people may choose to sell at a break-even level since they expect prices to fall further in a bear market. This behaviour increases available supply, in turn putting downward pressure on the price. Therefore, when the SOPR rises above 1 in bear markets, it identifies a good selling opportunity.
Shirakashi contends that the SOPR is influencing price changes, making it a leading indicator that provides signals before or during major price moves, not after the fact.
We can also use a moving average of the SOPR to identify tops and bottoms in the market. For instance, the chart below shows that the peaks and troughs of the smoothed 50-day moving average of the SOPR aligns with major tops and bottoms in the price of bitcoin.
Source: Glassnode
Paradigma capital’s Felipe Gaucho Pereira notes that the 10-day moving average of the SOPR is also useful, but calls out tops better than bottoms.
The 10-day moving average of the SOPR tends to bounce from a particular support level in bull markets and test a certain resistance level during a bear market. Another key characteristic of the moving average of the SOPR is that it can identify when bull or bear markets begin; when testing resistance at the end of a bear market, the SOPR moving average bounces on a line slightly below it giving the signal that a new bull cycle is beginning.
You can find a live version of the SOPR on Glassnode.