This market is getting very interesting. It has been under pressure all week, and volatility has increased dramatically. In fact, most of the indicators have turned bearish -- except for the most important one: price. $SPX has held above the 1540 support level, and if this turns out to be a third successful bottom in that area, one would expect the market to challenge the recent highs.
Wednesday was an ugly day for the market, and it didn’t have the convenient excuses that Monday did. It was just plain old selling. There was a modest rally at the end of the day that lifted prices off of their worst levels. Overnight, S&P futures are little changed in Globex trading. $SPX continues to hold above the 1540 support level (Wednesday’s low was just below 1544). That is the only positive indicator for the bulls right now.
The broad stock market, as measured by the Standard and Poors 500 Index ($SPX) continues to make new highs almost every day. $SPX finally moved above its 2007 intraday highs, and so it (and the Dow $DJX) are trading at prices never seen before.
$SPX clearly established 1540 as a major support level, as it has rallied strongly and sharply off that level twice in the last month.
Equity-only put-call ratios continue to be heavily distorted by protective put buying.
The market continued its upward march from the lows of Friday morning, right after that negative unemployment report. New closing highs were made, and it looks like this morning will finally bring about a new intraday high on $SPX, which is the last “hurdle” left from the 2007 highs. S&P futures are up about 5 points in Globex trading, and so that implies $SPX itself would open somewhere near 1579, which would be a new intraday high.
The stock market has had a bit rougher time this week. Our indicators are turning bearish now, and if there is a breakdown in $SPX, a full-blown correction should be underway.
This brings up the matter of whether or not the recent $SPX breakout to new all-time highs (and the Dow's as well) was a false breakout. I would not grade the recent breakout to new highs as truly false unless $SPX falls below support at 1540-1545.
There were seemingly two stock markets yesterday. By that I mean that the big-cap stocks that have led this rally continued to do their thing, driving $SPX and the other major indices to new all-time highs. But there is a lurking problem that is perhaps coming to light: breadth was negative yesterday! I can’t recall $SPX being up 8 points, yet both “stocks only” and NYSE-based breadth being negative, but that’s what happened yesterday.
Thankfully, the Standard and Poors 500 Index ($SPX) has finally closed at a new high, exceeding the market from October, 2007. Now that that's out of the way, perhaps we can go back to trading. Thursday's action was an upside breakout, and above that there is no resistance, per se, since prices have never traded that high. However, traders are often wont to sell at round numbers, so 1600 on $SPX may represent a resistance level.
The new mini options began trading on March 18th. We held off writing about them for a little while so that we could see how volume and open interest were trending. A mini option is for 10 shares of the underlying stock or ETF, rather than 100 shares as is the case with “regular” options. So far, there are mini-options only on five stocks: Amazon (AMZN), Apple (AAPL), Google (GOOG), Gold ETF (GLD), and S&P 500 SPRDs (SPY).
It always seems that the first volatility explosion sends a warning shot across the bow. That appears to be the case now.
Tuesday's low for $SPX was at 1538. That is now a support area. Below that, there is support at 1530. A violation of that level would likely signal the onset of a deeper market correction.
Meanwhile, equity-only put-call ratios may continue to be befuddled by the hedging activity of put buying.
The term "volatility skew" refers to the situation where individual options on a particular entity have different implied volatilities that form a pattern. The pattern usually takes one of two forms: either the higher strikes have the higher implied volatilities (a forward or positive skew) or the lower strikes have the higher implied volatilities (a reverse or negative skew).