The failure of the market to follow through Monday on Thursday and Friday’s strong gains resulted in a pretty nasty day on Tuesday. Breadth was terrible, volatility rose sharply, and $SPX retreated to the support near 1620. Overnight, S&P futures are up about 7 points, so it appears that the 1620-1650 range is containing prices for the near term. A breakout from there could generate some momentum in the direction of the breakout.
The pressure on the stock market increased again this week, driving the Standard & Poors 500 Index ($SPX) down through some support levels, and generally turning almost all of our indicators to sell signals.
The next support level for $SPX -- at 1600 -- is the extremely important one, and that held today. There is now resistance at 1625-1635.
Equity-only put-call ratios are strongly on sell signals. They are now trending upwards, which is bearish for the market.
Stocks sold off almost all day Wednesday. This did a lot of additional technical damage. Specifically, $SPX closed below the 1625-1635 support area and now that means the 1600 level is the next support. 1600 was a double top back in April, and when $SPX broke upward through there in early May, it set off the wild buying spree that carried the market straight upu to 1690. Thus it is quite important.
Neutrality, as it applies to option positions, means that one is non-committal with respect to at least one of the factors that influence an option's price. This isn't quite the same neutrality that governments display -- theirs being a much more diplomatic undertaking -- but it is a viable approach to trading options. Simply put, this means that one can design an option position in which he may be able to profit, no matter which way the underlying security moves.
Since stocks started to stumble last week, volatility has increased and a number of indicators have begun to look more negative.
The chart of SPX is still bullish, though. This week's low was 1640, and that is the first support level. There is also support in the 1625-1635 area, as well as at the still-rising 20-day moving average (near 1635).
Equity-only put-call ratios have started to roll over to possible sell signals.
The second issue in May (Volume 22, No. 10) is being published on the fifth Thursday – May 30th. This is because, on the regular 4th Thursday publication date, I was in Chicago to participate in the Barron’s Roundtable celebrating the 40th anniversary of the CBOE. The entire hour and a half panel discussion is available at CBOE TV.
The “collar” is an interesting and useful strategy – at times. This might be one of those times. With many high-yielding stocks having risen to dizzying heights, holders of those stocks may be somewhat leery of the gains that have taken place, but might also not be willing to sell the stocks because of the capital gains taxes that might be due on long-term holdings at low cost bases.
$VIX rose again yesterday (6 days out of 7), and its chart clearly shows the beginning of an uptrend. We had been saying that a close above 15.11 was necessary to confirm that uptrend, but it doesn’t really appear that way now. The uptrend is evident from blue line on the chart (below). A close below 14 would break that budding uptrend and return $VIX to a bullish state. But for now, I am grading $VIX as a negative indicator.
The stock market finally took a hit this week, but it hasn't really changed the overall picture -- yet.
First, as far as the chart of $SPX is concerned, it is still bullish. Yesterday's low at 1635 has to be considered a support level as well as 1625-1630, and then the more important support at 1600. if THAT were violated, it would be bearish.