On Monday, stocks rallied early, and held onto the gains throughout the remainder of the day. Overnight, S&P futures were up another 6 points in Globex trading. In other words, the upside momentum is strong and the bears seem to have disappeared. Support is at 1615.
Ever since the broad market bounced just over a week ago from the 1560 level, the bulls have been trying to gain complete control. So far, they have been stymied. $SPX has not broken out over resistance, nor has $VIX broken its uptrend. However, one other important indicator has turned bullish -- the put-call ratio.
$SPX has topped out in the 1620-1630 range for several days. A close above 1630 would be positive.
Today is a half-day, holiday-shortened session, and Friday will likely be a very low-volume affair. However, that doesn’t mean that prices can’t be volatile. In the bear market of 2002, the bulls engineered a 300-point Dow rally out of nowhere on July 5th, only to see the bears wipe it out completely in a few days after that. But if you have positions, these big moves can be meaningful.
The speed with which $SPX fell -- 63 points in two days -- meant that it sliced right through support areas without stopping. There is support at 1560 -- this week's low on $SPX. Furthermore, there is important support below there, at 1540, from a series of lows back in March and April.
Equity-only put-call ratios have not given confirmed buy signals yet. They remain on sell signals.
With the stock market collapsing recently, option implied volatility spiked higher in a large number of markets. Of course, actual (historical) volatility has increased as well, but it is implied volatility that reflects more of the panic mood of the public, and thus is the one that can be used as a contrary indicator.
(Barron's) - Options can be great contrary indicators.
Puts and calls are very versatile. Strategically, they can be used for leveraged speculation by some, while providing protection, income, or both, to others. Their prices and volume also can produce information advantageous for an investor or trader, even if that person doesn't actually buy or sell options.
The initial selling on Wednesday afternoon was probably just some profit-taking by traders who'd bought heavily on Monday and Tuesday. But then the selling gathered momentum.
After the FOMC meeting announcement Wednesday, the stock market fell sharply. All those people who had bought earlier – on Monday and Tuesday – had apparently become profit-takers by late Wednesday. Even though $SPX probed slightly above 1650 in the last two days, this was not an upside breakout. In fact, it just pushed the upper resistance area slightly higher, but $SPX still remains within the general 1600-1650 trading range.
The stock market has found itself under increasing pressure again this week, and once again seems to have found support at 1600. It is also clear that 1650 is resistance and $SPX is trading wildly and with great volatility in between those two levels.
Equity-only put-call ratios have remained solidly on sell signals throughout. Even on days when the market has rallied, there has been considerable put buying.
Market breadth indicators are currently mixed.
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.
