In focus: Oversold rally

By Lawrence G. McMillan

The decline in $SPX this month has been swift, but surprisingly orderly. For example, the 20-day historical volatility of SPX is only 14%, which is extremely low after a decline of the magnitude that we have recently seen.

See the Market Insight column for further information on the large discrepancy between implied and actual volatility.

Today’s rally was mostly a reaction to the massive oversold condition that has built up. An oversold rally of this type can usually extend to slightly above the 20-day moving average, which is currently at 1,360 and declining at the rate of about 5 points per day. Meanwhile, there is also resistance at 1,340. So, we are looking for this oversold rally to roughly reach the 1,340-1,360 range...

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