$SPX pulled back this week, partly because the market was overbought and also because the week after June expiration is a seasonally weak week. So far, it's just a normal pullback, with support at 2890-2900.
Equity-only put-call ratios remain strongly on buy signals. Their downward trajectory was not even fazed this week, as they held steady to their buy signals even while $SPX corrected a bit.
There is a seasonality to volatility that has persisted over the years. Not every year is the same, of course, but the general pattern is similar. This can sometimes be useful in helping one determine whether to expect increasing or decreasing volatility during the life of positions that are being established.
The prospect of lower rates in both Europe and the U.S. has driven the market into a bullish stampede, as it seems to be on a massive "high."
There should now be support on the $SPX chart at 2890-2900, the area which was most recently overcome as resistance. Below there, it's a sharp drop down to the major support at 2720-2730 (the March and June lows). There is no formal resistance, since we are trading at new all-time highs.
The stock market ($SPX) is opening at new all-time highs this morning, fueled by a very euphoric response to perceived rate cuts coming in both Europe and the U.S. That doesn’t seem like a recipe for long-term market success, but we are concerned with how the indicators look, rather than trying to predict what a small group of central bankers might do.
The strong oversold rally that abruptly began on June 1st is still in play. It is slowing down, but the bears have not been able to retake any of the rally's gains. There is resistance at 2940-2950, with support at 2720-2730.
Equity-only put-call ratios remain solidly on their recent buy signals. The TOTAL put-call ratio is on a buy signal, too.
On Monday of this week $SPX was near its lows at 3pm. But from there, there has been massive buying all week. However, the $SPX chart is still bearish, because there are lower highs and lower lows on its chart. Oversold rallies typically carry from their lows up to and slightly above the declining 20-day moving average. That's exactly what this rally has done so far (the 20-day MA is just below 2830).
Last fall, we published several studies in The Option Strategist Newsletter and summarized them here, as well as enacted several trades based on “big moves.” At the time, 20 of the 21 largest $SPX daily rallies had been reversed in a fairly short period of time afterwards (3 to 23 trading days). The only one that had not been reversed was the one coming out of the March 2009 bottom of the financial crisis. Then there were two – on December 26th, 2018, and January 4th, 2019 – that weren’t reversed either. The reason that these are usually reversed is that occur during volatile, bearish markets where rallies are fierce but short-lived. However, at the actual bottom (March 2009, December 2018) the rallies were real – not just oversold bounces.
McMillan Analysis Corp. president Larry McMillan's recent interview with Anthony Crudele was highlighted in his Best of May podcast. Click here to listen.
Stocks broke down through 2800 this week, and that had been a major support area. The $SPX chart is negative in that it is trending lower, now with lower highs and lower lows. There is only minor support below here, essentially at 2660-2680.
The main thing to keep in mind is that $SPX has not broken down below support at 2800. It was tested -- more or less -- once again yesterday and has held so far. A close below 2800 would be very negative from the viewpoint of the $SPX chart.
Overheard, the major resistance on the $SPX chart is the double top at the all-time highs. More than one bear market has started from a similar pattern.
