We have often made note of times when a particular market is so strong that it closes above or below its 20-day moving average for long periods of time. These are rather rare situations. While they are occurring, it seems that the market is going to keep going in that same direction forever. A few bullish cases have lasted so long that it seems that the market is “levitating” above its moving average. The last time this occurred was February-April of this year (Figure 1, yellow area).
The Standard & Poors Index ($SPX) broke out of the triangle that had formed on its chart (see Figure1), and that breakout was strongly on the upside. The bears had plenty of chances to violate the support at 2040 on a closing basis, but were unable to do so. So now we'll see if the bulls can do better with their chance.
The bears are now paying for their failure to seize control last week. Yesterday’s rally was strong and was assuredly due to a number of bears “throwing in the towel.” Yes, I know there was a favorable housing report, but that certainly wasn’t enough to justify a rally of that magnitude. So, can the bulls seize control? They have not been able to engineer a follow-through to strong up days, either. Today is their chance. S&P futures are up 6 points in overnight trading.
This article was originally published in The Option Strategist Newsletter Volume 24, No. 8 on April, 23 2015.
The chart of $SPX (Figure 1) shows a couple of things. First, the Index is in a downtrend. It has declined more than 80 points from the mid-April highs, at 2110. But the other fact that we can see from the chart is that $SPX still hasn't been able to close below 2040.
As a result, the two red lines make a triangle on the chart. Usually, a breakout from a formation like this is strong, but it can come in either direction.
Yesterday, the market saw two distinct “halves.” In the first half, the market rallied fairly well – once again trying to prove that there is no follow-through to big moves. In the second half, the FOMC minutes spooked traders, and prices fell sharply. $SPX penetrated well below the 2040 level, reaching 2034.49 intraday. But then, to once again prove that there is no follow-through, $SPX rallied into the close. So $SPX has not closed below 2047 in weeks.
...Equity-only put-call ratios temporized yesterday, moving slightly sideways, but they remain on sell signals as they generally continue to be in an uptrend. An interesting piece of data has arisen on the Total put-call ratio, though: its 21-day moving average is now above 0.90. That is an oversold condition that is a predecessor to what is normally a very strong buy signal. The buy signal will occur if either a) the 21-day MA moves back below 0.90, or b) the 21-day MA makes a peak that lasts for 10 days.
Lawrence G. McMillan was recently a guest on senior MarketWatch columnist Chuck Jaffe's MoneyLife podcast on May 12 at 12:30 PM. Larry's interview was a part of the "Technical Difficulties" segment where he discussed the current state of the market. Listen to the interview below.
Wednesday, May 12th
12:30 PM Eastern Time