The market has now pulled back from its recent highs, accompanied by sell signals in breadth and the put-call ratios we follow. The “modified Bollinger Band” sell signal remains in effect, as well. However, without $VIX, any correction is likely to be minor. But if $VIX should close above 14, the bears could begin to flex their muscles.
In a recent issue of The Option Strategist Newsletter, we deatailed a trading system based on a modified version of John Bollinger's Bollinger Bands. We have since received numerous inquiries asking how we calculate and plot our "modified" version.
$SPX broke out to new highs, and that is bullish, but severe overbought conditions still exist.
$SPX has support at 1750-1770, the range it traded in for a couple of weeks. Also, there is further support at 1730. Equity-only put-call ratios are on buy signals, but are in extremely overbought territory.
Breadth has been relatively weak for some time now. For example, $SPX is making new highs, but cumulative breadth is not. Thus, a negative divergence has arisen.
Wednesday was a very powerful, bullish day. It mirrored the action of last Friday: S&P futures were trading down sharply before the NYSE open, but once that market opened, it was off to the races on the upside all day long. Last Friday was a 30-point reversal day from low to high. Yesterday was a 24-point upside reversal. Those are huge moves, especially in light of the fact that actual volatility has been so low lately.
The broad stock market, as measured by the Standard & Poors 500 Index ($SPX) was seemingly impervious to an increasing overbought condition. But today after moving to new highs, the buyers finally ran out of gas, and the market reversed downward sharply. The negative trend should last for at least a short while.
The equity-only put-call ratios have been the lone bullish holdout. But now, the weighted put-call ratio has given a sell signal.
The stock market is once again overbought, and we have done more research into what we hope will be effective systems for taking advantage of these conditions. Most of the article is devoted to creating a trading system around the “modified Bollinger Bands,” but market breadth and volatility are “overbought,” too. A recommendation is made on page 4.
Stocks can go down, and it now looks like they will. The market, as measured by the Standard & Poors 500 Index ($SPX) continued to rise at a dizzying pace until the Fed meeting ended on Wednesday. Now stocks are taking on a more bearish tone.
Typically, the market pulls back to at least the 20-day moving average in these situations, and usually overshoots that target. Currently, that 20-day moving average is at 1725.
For some reason, traders seemed to take the benign Fed meeting announcement as negative. At least they sold after the meeting ended. That’s the fourth time this year that a Fed meeting has induced selling, and in the previous instances, the selling continued for a while – weeks, in some cases.
From mid-morning just two weeks ago (October 9th) through Tuesday's close, the Standard & Poors 500 Index ($SPX) rose 115 points. That is impressive, but the advance has been so swift that it has created a number of overbought conditions that are on the brink of becoming sell signals. $SPX has support at 1730 and 1700.
Equity-only put-call ratios have rolled over to buy signals.
