Things are beginning to deteriorate, somewhat in terms of price, but mostly in terms of our indicators. We've seen this scenario before, though -- most recently in late December, but the market response was subdued and volatility remained low. That combination resulted in a move to higher prices after December, and it could well be that the same is setting up now.
We usually try to run an article on this subject at least once during tax season. I realize that not everyone is aware of the rules governing Section 1256 contracts. Hence, since tax season is upon us, I thought this review might be of benefit to some of our subscribers – and to options and futures traders, in general. Section 1256 trades include all futures trades, as well as futures options. They also include option trades on cash-based indices ($OEX and $SPX, and especially $VIX), but not SPY or QQQ, for example, for the underlying in those cases is an ETF, not cash.
The $SPX Index has stayed above the +4σ “modified Bollinger Band” since Feb 13th – a total of 13 trading days and counting. This is rather rare, so we thought it might be interesting to see just how unique this is – and to see what happened at similar stages in the past. In the following paragraphs, “days” refers to trading days.
Overall, stocks had another very strong week, although there was certainly some hesitation yesterday. Even so, the trend remains upward for now. $SPX has moved steadily higher in a stair-step fashion all during the month of February. As a result, there are several support levels of interest. The highest is that in the 2350 - 2370 range, and below that is more important support at 2300.
Stocks have continued to move higher across all of the major averages. As might be expected after an advance of this magnitude and length, overbought conditions continue to abound.
One of the foremost things to consider, though, is that the chart of $SPX remains bullish. It continues to trend higher, with all moving averages in sync. The first major support area is at 2300.
Both equity-only put-call ratios continue to decline and thus remain on buy signals.
Exactly a week ago, on February 9th, $SPX broke out over 2300, establishing new all-time highs, accompanied by almost all of the major averages, including finally the small-cap Russell 2000 ($RUT). The chart of $SPX remains bullish as long as $SPX is above 2300.
Both equity-only put-call ratios have turned sharply lower in the past week, as the upside breakout has been accompanied by heavy call buying. Thus they remain on buy signals.
The stock market, as measured by most of the major indices, made a breakout move to the upside yesterday and is now trading at new all-time highs once again. $SPX is clearly in an uptrend and holding above all support areas, which is bullish.
Equity-only put-call ratios continue to crawl along the bottom of their charts, moving mostly sideways rather than up or down. This is another overbought indicator, but it won't really become bearish until these ratios begin to trend higher.
Long-term cycle charts are interesting to look at, but I’m not sure how much they help one’s trading or strategy. In any case, there is a website, www.seasonalcharts.com that has such charts, and one that can be quite interesting is the 10-year cycle chart of the Dow. In other words, the data for the Dow is accumulated by year and then published in a way that you can see the pattern of each year of the decade – going back to 1897 in this case.
The broad stock market has gone into a very tight range over the last four trading days. After what had appeared to be a promising upside breakout on a gap a week ago Wednesday, there was no follow-through on the upside. Meanwhile, there has been no follow-through on the downside either. The $SPX chart remains bullish from a trending viewpoint.
