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The main thing to keep in mind is that $SPX has not broken down below support at 2800. It was tested -- more or less -- once again yesterday and has held so far. A close below 2800 would be very negative from the viewpoint of the $SPX chart.
Overheard, the major resistance on the $SPX chart is the double top at the all-time highs. More than one bear market has started from a similar pattern.
Equity-only put-call ratios remain strongly on sell signals. They are continuing to rise daily, and they are really not far up their charts yet -- meaning there is plenty of room to go before they become "oversold."
Breadth has been poor of late, and thus both breadth oscillators are once again in agreement, and they are on sell signals.
Volatility, however, is not worried about any of these things. $VIX is at extremely low levels, considering the internal damage that has been done to the market. A sustained move back above 17 would be bearish.
In summary, there are plenty of negative indicators, mixed with a few oversold buy signals. But all that really matters is the 2800 level. The bulls can still resuce this market as long as $SPX does not close below 2800.
Larry McMillan was recently interviewed by host Anthony Crudele for the Futures Radio Show. Larry discussed how he learned to trade options, technical analysis techniques, an S&P straddle trade, reasons to trade mult-leg positions and much more in this 40 minute interview.
The following table is a summary of the results, by strategy, showing the number of positions recommended in that category; the number of wins and losses, the win percentage rate, the total profit or loss in that category, and the average return at annual rate (the average return, annualized using the average holding period).
Spec Non P-C
Overall, there was a profit for 2018, over 247 total recommendations. The average return, at annual rate, was 15.1% (first number in the bottom line of the above table). All hedged positions (“ALL HEDGED”) delivered a strong return, while all speculative (“ALL SPEC”) returned a small profit...
$SPX bounced off of strong support at 2800 on Tuesday, and then fell back from resistance at 2890-2900 on Thursday, so for now $SPX is in trading range between 2800 and 2900 (roughly). I don't expect that range to last long, and a breakout either way is probably going to gather momentum quickly.
Perhaps the most bearish indicators in our arsenal at the current time are the equity-only put-call ratios (Figures 2 and 3). Put volume has been heavy all week, despite the 90-point rally off the 2800 level. As a result, these ratios are racing higher, and that is bearish for stocks.
Market breadth has jumped around madly. When the market sold off, the breadth oscillators plunged and the "stocks only" breadth oscillator descended into official oversold territory. It has since recovered and issued a buy signal, which is still in place.
Volatility remains in its own world. First of all, $VIX produced a "spike peak" buy signal. But a longer-term look might be a little more problematic, as $VIX is in an uptrend at this time.
In summary, there are arguments that can be made for both bullish and bearish scenarios. It will likely be settled by price action, as alway. A move above 2900 or below 2800 should accelerate momentum in the direction of the breakout.
Supposedly because of the China trade talks, but probably as much because the market was overbought and tired. $SPX headed lower this week. Several support levels have since been violated, but not all of them. This could still turn out to be a minor correction if support at 2800 can hold. However, caution is certainly warranted at this time, as the burden of proof is now on the bulls. The most negative aspect is that there is a double top in place now.
Equity-only put-call ratios are decidedly bearish, both to the naked eye (they are rising) and to the computer analysis programs.
Market breadth oscillators had been weakening even as $SPX was making new highs. There had been a couple of premature sell signals, and now another sell signal is in place.
Finally, this brings us to volatility. $VIX has been the friend of the bulls for so long that it's hard to remember when it wasn't. $VIX was benignly trading below 17 (on a closing price basis) for months. But this past week, that changed, and $VIX blasted to the upside. By closing above 17, it is now in an uptrend, which is negative for stocks.
However, in a short-term bullish move, $VIX spiked up and back down again, and that could cause a sharp, short-term rally.
In summary, despite a bevy of negative indicators, as long as $SPX support at 2800 is not violated, this could turn out to be a mere correction, but it's too soon to say that will the case.
The Fed announced that they weren't planning on cutting rates at this time. That was a "shock" to the media, but probably not so much to traders. In any case, $SPX sold off after that, causing some sell signals to be generated.
Countering that negativity, though, is the fact that the $SPX chart is still positive (Figure 1). Even though it pulled back a little, it hasn't even closed below its still-rising 20-day moving average. Thus the $SPX chart itself remains bullish, with support at 2910 and various levels below that.
Equity-only put-call ratios are beginning to roll over. From Figures 2 and 3, one can see that the ratios have curled upward from very low levels. Thus, they are now on sell signals.
Market breadth has only been modestly positive for nearly a month. Then, the selling on April 30th rolled them over to sell signals, where they remain today.
Volatility remains bullish for stocks, in that it just can't get anything going on the upside. As long as $VIX remains below 17, there isn't going to be a major correction in stocks. There could be a correction, yes, but not a major one.
Overall, the $SPX chart remains bullish, but we are seeing some sell signals. As we've noted many times in the past, in situations such as this, one must still rely heavily on the $SPX chart. So, we remain bullish until support is broken on the $SPX chart.
Several of our indicators generated sell signals at yesterday’s close – mBB, weighted equity-only put-call ratio, and both breadth oscillators. Stocks had been grinding higher in the morning yesterday, then after the FOMC Meeting, the market sold off, triggering these new sell signals. It appears that the first correction since the brief one in early March could be at hand.
The $SPX chart itself still looks fine. It has not even pulled back to its rising 20-day moving average (currently about 2910), and other trendlines, along with the “modified Bollinger Bands” are still pointing higher. There are various support levels – none of which has been tested very much. The first is at 2910 (last week’s low), then 2890 (the mid-April lows), and 2870 (an early April low). The breakaway gap at 2835-2850 is still on the chart, and that could provide support at well. Finally, the strong support that was tested back in late March – at 2800 – is still in place.
Meanwhile, a “modified Bollinger Band” (mBB) sell signal has finally occurred...
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$SPX made a new all-time closing high this week. The $SPX chart is strong and bullish, although the internals as represented by some of the other indicators are not nearly as strong.
There is support at 2890 and 2870, with major support at 2800. It seems to me that a break of 2870 support would be a problem.
Both equity-only put-call ratios remain on buy signals. They have moved strongly lower this week, after the new highs were made in $SPX. That is, there has been a strong increase in call buying this week, as far as stock options go. Both ratios are now making new lows for this move in 2019, making them both overbought.
Market breadth has been quite lackluster for a couple of weeks now. As a result, the breadth oscillators are back on sell signals again.
Volatility, however, is very bullish. If you're looking for a place where complacency reigns, this is it. $VIX has spent the entire month of April closing between 12 and 14. It may seem that 17 is far away from current $VIX levels, but that's still the place where we think $VIX has to exceed in order for $VIX to become a bearish stock market indicator.
In summary, the $SPX chart looks fine. $SPX is the dominant indicator (many times it's held steady while the other indicators have faltered), so that keeps the short-term outlook bullish. However, if support should be broken, the states of the other indicators will be more important, and a sharp market correction could develop.
The $SPX chart itself is fine. It is rising, with all trend lines moving higher, including the "modified Bollinger Bands." There should be support near 2850, and perhaps even near 2870. Our target all along has been the all-time highs at 2940 and it still is. Unless this market regains some momentum, though, it is going to meet stiff resistance there.
The equity-only put-call ratios are typical of many of our other indicators: bullish, but overbought. The ratios have continued to decline at a very slow pace of late, and remain on buy signals.
Market breadth has been deteriorating. Thursday, April 18th, saw the markets higher all day, yet breadth struggled. At the close, NYSE breadth was slightly negative and "stocks only" breadth was positive by only a very tiny amount. Regardless, both breadth oscillators remain on buy signals.
Volatility is not worried, however. $VIX remains in a long-term downtrend (since Christmas Eve), and as long as volatility remains flat to down, stocks can rally.
In summary, none of our indicators are on sell signals. The $SPX chart looks fine. However, there are many overbought conditions, and market action has been sluggish. For that reason, we expect a short- term market correction to build up buying power and erase some of those overbought conditions.
The “mistake” that the market often makes is getting too complacent during rally phases. One of the signs of complacency is extremely low volatility. Part of this is unavoidable as the calculation of historic volatility necessarily yields lower numbers as the market trades at higher prices. Furthermore, short-term implied volatility will not deviate too much from realized volatility, for there are quasi-arbitrage strategies that will be put in place, holding implied volatility down. Longer-term volatilities can remain higher though – not adhering to realized volatility, but normally trading more towards the long-term average volatility of the underlying.
At the current time, $VIX is just below 14. That’s low, but not “too low.” However, if one looks at the longer-term volatilities as calculated by the CBOE’s Volatility Indices, signs of complacency are beginning to appear. Specifically, the longest-term CBOE Volatility Index is the one-year (symbol: $VIX1Y). It is currently trading at about 17.50 – quite low for long-term implied volatility estimates. Typically, if a trader asks a market maker for a quote on a one-year option, the market maker would price the option at an average long-term volatility. The long-term volatility of $SPX and other broad-based indices is normally at least 20, or even higher. That’s why volatility term structures slope upward in bull markets – because the farther out one goes, the less weight is placed on near-term (low) volatility, and the more is placed on longer-term (average) volatility...