The stock market has taken a real beating in the new year. Massive oversold conditions have arisen, and a sharp, but short-lived rally is possible at any time. The larger picture, though, is an intermediate-term bearish one.
$SPX has been down-trending since early December, when the first pattern of lower highs was established. The current pattern of lower highs and lower lows remains intact, and that is bearish.
Usually we make this the topic of a longer article at year-end, but frankly we are not holding positions for anywhere near a year, so this is just a mental exercise – not having a lot to do with our style of trading.
The stock market had been muddling its way through the Santa Claus rally period, and this now looks like it will put the final, negative touches on this seasonally important period.
At this time, the chart of $SPX is bearish, with lower highs and lower lows (see Figure 1). There is support near 2000, where $SPX appears to be headed for a retest very early in the new year.
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Recently, the CBOE’s Volatility Index ($VXST) closed above all three of the other CBOE Volatility Indices. At the time, it struck me as being a rather rare occurrence, and it seemed there might be some considerations as to forthcoming market movement. Consequently, a rather extensive study was performed, and indeed a trading system did emerge, as this article will reveal.
$SPX has now climbed slightly above its declining 20-day moving average, and that is where oversold rallies usually die out. Despite the strength of the last week, $SPX has not even exceeded last week's high, much less the more important peak of early December. It is in a downtrend, with a pattern of lower highs and lower lows.
Stock market volatility continues to be above-average. The oversold rally that took place earlier this week seems to have run out of steam.
The $SPX chart is now showing lower highs and lower lows. That is a bearish trend developing. It will remain in effect until the most recent high is exceeded (2100, in this case).
Both equity-only put-call ratios remain on sell signals.
Breadth is the difference between advancing issues and declining issues, usually measured on a daily basis. Since the major averages only reflect what has happened to a few of the more important stocks (500 stocks in the Standard & Poors 500 Index – $SPX – for example, or 30 stocks in the Dow Jones Industrial Average), technicians have long used breadth as a measure of the health of the overall stock market.
So far in December, we've seen volatile $SPX daily moves of +22, -23, -30, +42, followed by a 4-day decline of 75 points. There is resistance at 2100 (the late November peak) and support at and 2020 (the November lows).
Equity-only put-call ratios remain bearish, since they continue to rise. Their rise is faster now, since put buying has increased in intensity this week.
The $SPX chart now has heavy resistance in the 2080-2100 area, where it spent most of the previous two weeks. The support at 2020 (November lows) is still in place as well, and will likely be tested in the coming days.
Both equity-only put-call ratios are on sell signals, and they are now beginning to race higher on their charts.