Weekly Stock Market Commentary 1/21/2022

By Lawrence G. McMillan

The stock market has finally succumbed to months of negative internals, and now the large-cap indices are following the "troops" lower. $SPX has broken down below the bottom of the trading range, violating support at 4500. Not only that, but it has closed below the December lows, which is another longer-term negative for the market.

This decline has exacerbated oversold conditions in many areas, though, so expect violent oversold rallies within what is now a bearish downtrend.

Equity-only put-call ratios are on sell signals. That is, they are rising -- especially the weighted ratio, which has now reached new heights. This is an oversold condition. However, these ratios will not generate buy signals until they roll over and begin to decline.

Market breadth has been abysmal. The breadth oscillators are on sell signals and are extremely oversold. This will eventually lead to buy signals but it won't happen immediately.

Meanwhile, $VIX had been reluctant to verify this downturn in stocks, but it is now getting with the "program." $VIX is back in "spiking mode," and has thus stopped out the most recent $VIX "spike peak" buy signal of January 10th.

We don't give much credence to these long-term indicators: the first 5 trading days of January, and the entire month of January, but the first 5 were negative this year, and it's beginning to look like the entire month of January has a good chance of being negative as well.

With this breakdown, one can take a "core" bearish position, although it might be best established in stages because of the huge oversold condition. In addition, we will have a lot of trading systems setting up confirmed signals in the coming days and weeks, and so we view this as a good trading opportunity.

This Market Commentary is an abbreviated version of the commentary featured in The Option Strategist Newsletter.