Stocks had been declining somewhat since mid-August 1987. The week of October 12-16, 1987, saw an “up” day on Tuesday, October 13th, but then three successive down days, through the rest of the week. Friday, October 16th, 1987, was an expiration day (back then, the 3rd Friday was the only monthly expiration for listed options). The Dow closed down 110 that day – the worst decline, in points, in its history.
The markets are moving so quickly right now that it's difficult to assess some of the technical indicators. This is the first time since the 2008 financial crisis that volatility-based hedges are keeping traders afloat.
After two monster rally days this week (Monday and Wednesday), $SPX has resumed its decline with a vengeance. The lows of last Friday, February 28th, at 2885 still represent support although in a market moving this fast, is there really any "support?"
A week ago, $SPX was still pushing higher. Then, in the blink of an eye, $SPX gapped sharply downward on Monday morning -- leaving a huge gap on the chart that likely isn't going to be filled anytime soon.
Nearly every indicator we have is in oversold territory, and there will be buy signals in the relatively near futures, but there are none at this time. Support levels don't mean much right now, so it's fruitless to try to identify them.
This article was originally published in The Option Strategist Newsletter Volume 18, No. 4&5 on March 5, 2009.
We have been using the hedged strategy between volatility and the broad market for over a year now, and the results have been good. But there’s more to this strategy than meets the eye. So, perhaps it isn’t useful only when $VIX futures are sporting a big premium or discount. It might make sense in a broader array of situations.
A decoupling of sorts has appeared in the market this past week. It's a bit reminiscent of the "Nifty 50" group back in the 1970's, but if today's version of those high-flyers really does have a serious correction, it will drag everything down with it, just like it did in 1973-74.
The S&P 500 Index ($SPX) broke out to new all-time highs again this past week, and now has closed at a new all-time high or traded at a new intraday all-time high on six of the last seven trading days. That keeps the $SPX chart bullish. There should be some support near the 3340 area, which was the old highs that were exceeded this week.