In the past week, the Standard & Poors 500 Index ($SPX) had a huge rally. Specifically, it rose by more than 1% for three consecutive days – for the first since October, 2011. On the surface, it seems that this is a powerful move that should inspire further gains. But I prefer to see hard facts, and so we ran the data on these types of moves.
The rally has been powerful, but is it just another oversold affair? At this point, we can't really tell. The next resistance area is at 1940-1950, and that's a more crucial point. If $SPX can rise above that level, then it will have formed a "W" on its chart, and that would be quite bullish.
On the other hand, if the 1950 resistance holds, or is quickly retraced, then a much more bearish scenario unfolds.
We have written about the Total put-call ratio many times in the past, so I am not going to get too involved with the explanation of the system, but I did want to show a recent chart and summarize the most recent signals.
The market broke down through support this week. $SPX retraced all the way to 1810, the January intraday lows. The $SPX chart remains negative, with a downtrend in place and heavy overhead resistance.
Conversely, the put-call ratios are becoming bullish. The computer analysis is calling these buy signals, and with the naked eye, one would have to agree.
Market breadth continues to be a problem. Both breadth oscillators remain on sell signals, but they are in oversold territory.
The CBOE is introducing two new variations on volatility products. The first is that there will be weekly $SPX options expiring on Wednesdays (“Wednesday weeklys” is what the CBOE is calling them). Recall that $SPX options are the foundation for the $VIX calculation. $VIX futures and options expire on Wednesdays, and now that there are weekly $VIX futures and options, these Wednesday $VIX expirations extend out several weeks.
The current year started off in a very similar manner to 2008, with the market dropping sharply through the Martin Luther King holiday. The year 2008 surely conjures up some unpleasant memories for most investors and traders (unless you happened to be short at the time – or long volatility calls, as this newsletter was). In this article, we’ll look at similarities in price action as well as the Volatility Index ($VIX) between 2008 and 2016.
Stocks continue to have trouble rallying, but at least support has shown up in the 1870 area of $SPX. If that level is broken on a closing basis, it would mark the end of any short-term rally attempts.
Even though both equity-only put-call ratios are on sell signals and pressing against new highs, they are in deeply oversold territory.
Market breadth has improved this week. As a result, both breadth oscillators are now on buy signals.
A “modified Bollinger Band” (mBB) buy signal is nearly upon us. It almost occurred today (Thursday, January 13th), but missed by a couple of points. We began to wonder how past sharp market declines lined up with the eventual mBB buy signal. Was the first signal successful, or did it take a number of probes before the market eventually bottomed. Was the mBB buy signal the bottom of the market, or did it continue on downward at a later time?
The market has finally stabilized to some extent. Even though $SPX had wide swings in the past week, there was a net gain over the past five trading days.
There is strong support at 1820 (see Figure 1), because that is where this January's decline halted, and where the declines of April and October 2014 also halted. A breach of that area would be quite negative.
Composite Implied Volatility (CIV) – for an individual stock – is calculated by weighting the individual implied volatilities of each option that traded on that stocks, by volume trading and by distance in- or out-of-the-money (at-the-money gets the most weight). We calculate this daily and store it in a database. Later, then, it is a simple matter to determine the percentile of the stock’s CIV by comparing the most recent reading to the past 600 (or whatever) readings.
