Some of the intermediate-term indicators seem ready to capitulate and issue buys, but the overall picture is far from "all clear" at this point. Despite recurring volatility, $SPX has traded in a new range in the last couple of weeks -- 1870 to 1990.
One of the great things about trading is also one of the worst things – the market can spring things on you that you never saw coming. Even if you were bearish, you certainly didn’t expect this kind of reaction (or if you did, I submit you’ve been bearish for a long time). In volatility trading, surprises can occur as well – and they have done so this time, as well.
The relative calm of the stock market trading in a range for six months was shattered in recent days. As recently as August 18th, all was calm. But beginning with a sharp 17-point drop in $SPX on the 19th, the rout was on. The support area at 1980-2000 was blown away, but it may offer some resistance on the way back up. There should also be major resistance at the 2040 level. Meanwhile, Monday's lows at 1870 represents support. If that is violated, last October's lows at 1820 are the next support area.
The market took a beating yesterday, as $SPX finally got in line with the indicators, most of which had turned bearish in the last week or so. $SPX closed just below 2040, which technically is a violation of the previous trading range (2040-2135). However, as you can see from the chart in Figure 1, it's still in the general area of the low of the range. If prices should rally from here, we would certainly say that the trading range has held.
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The stock market continues to hover in its trading range. Despite some promising buy signals from sentiment extremes in put-call ratios and $VIX, there was no follow-through by the Standard & Poors 500 Index ($SPX). We have often said -- and still maintain -- that price is the most important indicator. Regardless, as long as $SPX remains in the broad 2040-2135 trading range, the chart is neutral.
We have been operating an event-driven straddle buying strategy in advance of earnings for several months now, with mostly favorable results. However, this week something happened that we haven’t seen before: the straddles increased greatly in value before the earnings were announced.
The chart of $SPX is the least bullish of the indicators. SPX remains in the 2040-2135 trading range that has bound it for most of this year. Basically this is a neutral chart.
Put-call ratios are much more encouraging. A strong buy signal has been generated by the standard put-call ratio (Figure 2). The weighted equity-only put-call ratio is also bullish (Figure 3).
Market breadth remains mixed, with the NYSE-based indicator now on a buy signal, but the "stocks only" is not.