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First and foremost, the $SPX chart still has a bearish look to it. This oversold rally has been very strong; there's no doubt about that. But oversold rallies often die out at about the declining 20-day moving average, or maybe just a little above that. This rally has just reached that level.
Equity-only put-call ratios have exploded off their multi-year lows and are racing higher at a quick pace. The weighted ratio has reached multi-year highs and is oversold. Despite that, both of these ratios will remain on sell signals until they roll over and begin to trend downward.
Market breadth has been strongly positive this week, and both breadth oscillators finally rolled over to buy signals.
As trading opened on Monday, February 5th, 2018, stocks had already been falling for a few days. Then on that day there was a major decline – the largest drop in point terms in history. The Dow was down 1,175 points. The S&P 500 Index ($SPX) was down 113 points. All other major stock indices suffered similar fates. Those net changes were effective as of the 4 p.m. (Eastern time) close of the NYSE.
In just nine trading days, $SPX is down 9.0% and has lost 291 points. That's a lot of distance in a short time. This decline has rolled nearly every intermediate term indicator into a bearish status, if it wasn't there already. It has also caused some massive oversold conditions to appear. But remember, "Oversold does not mean buy," and that is lesson that is harshly taught every time the market sells off like this.
Stocks sold off sharply this week -- the first decline of any note since early last December. This one may have some sticking power, though, as rally attempts failed all week, and then when support was broken on Friday morning, a rout was on.
I am fairly certain that support at 2680-2700 will prove to be useful, but there isn't much support above that. The $SPX chart will remain positive unless the 20-day moving average rolls over and begins to decline. As you can see in Figure 1, it is still rising with a small slope.
This is something that we’ve written about twice before – first in 2011 (Volume 20, No. 16) and later in 2013 (Volume 22, No. 15). In short, one measures the advance in the $SPX Index over a 494-day span (trading days). If it has risen 50% or more over that time, it is a major overbought warning. However, to use it effectively as a timing tool is difficult, for the market can continue to advance (five times since 1950, the advance has reached 70% in that time period – of which four were relatively major tops). Moreover, there can be long periods of time (weeks or maybe even a couple of months) where the measure flits above 50%, then below, then above, etc.
The superlatives that are being used to describe this market are well-deserved. $SPX has advanced so fast that there really isn't any support, unless you want to declare the low of the "half-day" correction at 2825 a minor support area. The one clearly defined support area is the 2680-2700 area that was formed in late December and from which this January rally was launched.
Call buyers are making money in this market, and they are piling in with a vengeance now. The equity-only put-call ratios are dropping even more rapidly than they previously were. That makes them overbought, but they are on buy signals.
Before you get too excited about a new volatility product, let me explain that the two new ETN’s – short-term volatility (VXXB) and intermediate-term volatility (VXZB) are merely the eventual replacements for VXX and VXZ. The latter two (VXX and VXZ) have a maturity date of January 30, 2019 – ten years after they were introduced. These two new issues will replace them. So, for now, the new issues are trading with a “B” at the end of their symbol. When VXX and VXZ mature in about one year, these two new ones will remove the “B” from their symbol and will trade as usual.
Stocks continue to advance at a rapid rate. Despite one half day of correction (down 40 points from high to low on Tuesday), $SPX has closed at new all-time highs on three of the last five days. There is now minor support at 2770 -- the low of the half-day correction that took place.
Equity-only put-call ratios continue to make new multi-year lows. The standard ratio hasn't been this low since the summer of 2014, and the weighted ratio hasn't been this low since the spring of 2010. For now, they are overbought but not yet on sell signals.
The chart of $SPX could not be more bullish. It is in a strong uptrend, well above all of its meaningful trailing moving averages, and continually making new all-time highs. Other indices are in similar shape, as far as making new all-time highs, but $SPX has the strongest chart of them all, going back to the election in November 2016. That's when this monster rally was launched, and it's still in full force.
There are now six unfilled gaps on the $SPX chart. I have marked them with horizontal purple lines on the chart in Figure 1.