By Lawrence G. McMillan
One of things I’ll always remember about the Crash of ‘87 (actually, I’ll always remember everything about the Crash of ‘87 – at least from my vantage point) was that the market was down on Wednesday, Thursday, and Friday of the week before, with Friday being the worst day. That Friday, October 16th, saw the Dow drop 110 points – the largest point drop in history up to that time. Of course, Monday was the Crash. On that Monday, the futures opened down about 20 points (roughly equivalent to 120 points today, by my estimate). So I learned to respect a market as being potentially extremely bearish if there is a big drop into a closing low on Friday. Another notable (bad) memory came in August, 2015, when $SPX opened down 100 points on Monday after an ugly close to the week before.
A week ago it seemed that $SPX had broken out of the "box" that had contained prices for nearly a month (red box in Figure 1) and was set to challenge some resistance levels. That came to an abrupt halt, and $SPX sold off more than 100 points in five trading days. But then, for the nth time, $SPX bounced off the 200-day moving average. A strong rally has ensued.
In some ways, the market has recently shown a good deal of strength. But in other ways, it has to do more to overcome the intermediate-term bearish trend that still exists.
This week, $SPX finally broke upward out of the "box" that had been containing prices since March 26th (marked in red in Figure 1). However, the real test will come at 2750. If the rally can't break out above there, the $SPX chart will still be in a bearish downtrend.
It may not seem like it, but $SPX has been in a wild trading range between 2585 and 2660 since March 23rd. Moreover, the range is constrained between two moving averages: the rising 200-day MA from below, and the declining 20-day MA from above. Hence, a breakout from this range should produce a strong initial move. The range is noted by a red box in Figure 1.
Last week we published an article showing the different reactions of $VIX to the initial 6% drop in the stock market in early February, as compared to the 6% drop in the stock market in March. In February, $VIX exploded from essentially 15 to 50. In March, a similarly-sized move in the stock market only produced a rise in $VIX from about 15 to 25. That’s a big difference. For reference, those reactions are shown in Figures 5 and 6 – reprinted from the last issue.
From a simple point of view, this market has once again bounced off of the still-rising 200-day moving average several times. If it were to close below there,then that would be very bearish, for a new leg of the downtrend would be in place. Until then, though, there is the possibility that the support in the 2580 area will hold, and further progress can be made on the upside.
As far as the $SPX chart goes, the 200-day moving average (MA) has proven to be the rock that is holding the market together. It stalled the first decline back in early February, and now $SPX bounced off it four times in the last week, refusing to fall below each time. This creates a support area in the 2585-2590 range. But if that is broken, things could get ugly quickly.
$SPX has not only violated support, but it has broken its modest uptrend line (red lines on the chart in Figure 1). It also has negated its pattern of higher lows (the two lows that, when connected, made that red trend line on the chart). So the chart is bearish. There are potential support lelves at 2620, 2580 (where the 200-day moving average is), and 2530 (the Feb lows).
An optimist would still see the bullishness in the $SPX chart, with the higher highs (mid-March vs. late February) and the higher lows. A pessimist would see failure to break out over 2790 this week as a major problem. So, one needs to watch resistance at 2790 and support at 2730 as significant levels.
The equity-only put-call ratios have remained solidly on buy signals.
