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By Lawrence G. McMillan

Stocks continued to fall this week, after the last failed "one-day wonder" rally on May 4th. Support was broken at 4100, which quickly saw $SPX trade down below 3900. There is some support at that level, but there is a more well-defined support level at 3700 (the lows of February and March, 2021). Needless to say, the chart of $SPX remains in a downtrend (blue lines in Figure 1).

There are massive oversold conditions in put-call ratios, breadth, and New Highs vs. New Lows, but an oversold market is always dangerous. It can continue to decline sharply even while oversold. Any pversp;d rally is likely to fail in the 4200-4300 area.

Equity-only put-call ratios continue to rise, so they remain on sell signals. They are quite high on their charts, meaning they are oversold, but they were higher in March of 2020. They will not generate buy signals until they roll over and begin to decline.

Both breadth oscillators remain on sell signals, but they are deeply oversold. From these levels, it is going to take at least two or three days of positive breadth, just to get a buy signal.

$VIX continues to be in its own world. First of all, the previous "spike peak" buy signal was stopped out on Monday, but by yesterday a new one had set up. It is marked with a green "B" on the chart in Figure 4.

The trend of $VIX remains negative for stocks, though, as both $VIX and its 20-day Moving Average are well above the 200- day MA. Currently, that 200-day MA is at about 22 and rising. $VIX would have to fall below that in order to "stop out" the intermediate-term sell signal that is in place.

In summary, we continue to maintain a "core" bearish position because of the trends of $SPX (downward) and $VIX (upward). Of course, we recognize the oversold conditions represent strong, but probably short-lived, rally potential, so we will trade any confirmed buy signals around the "core" bearish position.

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

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