By Lawrence G. McMillan
The oversold rally that began with a furor in late May appears to have run its course. $SPX traded in a 100-point range for seven days, before finally breaking down yesterday (June 9th). The red box in Figure 1 denotes that tight trading range. It now seems likely that $SPX will test the May lows, in the 3800-3900 range. A violation of that area would then see a new leg of the bear market beginning.
From a more intermediate-term point of view, the $SPX chart is still bearish (note the blue trend lines in Figure 1). Until there is a disruption of the pattern of lower highs and lower lows, the $SPX chart will be intermediate-term bearish.
Equity-only put-call ratios have remained on buy signals, despite the negative turn in $SPX. This will certainly be put to the test if $SPX drops towards its May lows, but for now this indicator remains bullish.
Market breadth, on the other hand, has turned negative. Both breadth oscillators are now back on sell signals. Despite the strong, positive breadth of the rally in late May, there was no follow- through from breadth (similar to many occurrences in the past year+).
The trend of $VIX -- the intermediate-term stock market indicator -- remains negative for stocks. That is, the trend of $VIX is still upward. By our definition, that means that both the 20-day Moving Average of $VIX and $VIX itself are above the rising 200- day MA.
In summary, we are maintaining a "core" bearish position because of the trends of $SPX (downward) and $VIX (upward), as well as the recent $SPX breakdown below the 4070-4170 trading range. If there are signals from the short-term indicators, we are trading those as well.
This Market Commentary is an abbreviated version of the commentary featured in The Option Strategist Newsletter.
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