The “mistake” that the market often makes is getting too complacent during rally phases. One of the signs of complacency is extremely low volatility. Part of this is unavoidable as the calculation of historic volatility necessarily yields lower numbers as the market trades at higher prices. Furthermore, short-term implied volatility will not deviate too much from realized volatility, for there are quasi-arbitrage strategies that will be put in place, holding implied volatility down. Longer-term volatilities can remain higher though – not adhering to realized volatility, but normally trading more towards the long-term average volatility of the underlying.
Overall, the $SPX chart is bullish. The trend lines and Bands are all moving higher (even the 200-day Moving Average is edging higher), and the only resistance area of significance is that at the all- time highs -- which should be the next stop.
As it stands now, $SPX is in a trading range between those extremes of the past week: 2785 to 2860. Indicators have become mixed during this pullback, so probably the best indicator will be price action itself. That is, follow a breakout above 2860 or a breakdown below 2785 as the impetus for the next directional move.
Finally, $SPX has broken out over the heavy resistance at 2820. The breakout wasn't as resounding as expected, and we are in the process of retesting the breakout zone (2800 is the low end of the zone). A close back below that level would be very negative at this time.
Many volatility traders – we are among them – complained about the lack of response by volatility derivatives during last fall’s market decline. That was especially true in the downward thrust in December. $VIX itself managed to put together a decent move, as it rose from 16 in early December to 36 on Christmas Eve. But one cannot trade $VIX; only the $VIX derivatives are available for trading.
This past Monday, March 4th, $SPX made another attempt to challenge the resistance at 2820. It got as high as 2816 -- essentially the same levels as last October and November before falling back once again.
Now it has fallen back below the 200-day Moving Average, which is at roughly 2750 and more or less moving sideways. Furthermore, the previous trading range (2750 - 2820) has been violated on the downside.
Stocks have run into a bit of a roadblock this week, as the resistance in the 2800-2820 area on the $SPX chart has proven to be rather formidable. Of course, it didn't help the bulls that the market had already rallied over 450 points in two months before attempting to challenge that resistance area.
$SPX continued its phenomenal post-Christmas rally (which to date has registered over 400 points of gains), but has still not broken through resistance at 2820. Unless that happens, the next peak on the chart will still be a lower high, and the $SPX chart will still have a negative tilt to it.
The first signs of bearishness are beginning to creep into the superbly strong rally that has taken place since Christmas. $SPX rallied into the 2720-2740 area this week, which is now resistance and has now backed off. Now we have our first sell signal.
The stock market's new love affair with the Fed continued this week, and the market really took off after the FOMC meeting on Wednesday. $SPX has now broken out over minor resistance at 2675, having gained a whopping 15% since the market's low close on Christmas eve (a mere 26 trading days ago).
The most important resistance is at 2800-2820. There is support at 2620, and then 2350.