Recently, the CBOE’s Volatility Index ($VXST) closed above all three of the other CBOE Volatility Indices. At the time, it struck me as being a rather rare occurrence, and it seemed there might be some considerations as to forthcoming market movement. Consequently, a rather extensive study was performed, and indeed a trading system did emerge, as this article will reveal.
Recently, the CBOE’s Volatility Index ($VXST) closed above all three of the other CBOE Volatility Indices. At the time, it struck me as being a rather rare occurrence, and it seemed there might be some considerations as to forthcoming market movement. Consequently, a rather extensive study was performed, and indeed a trading system did emerge, as this article will reveal.
The stock market, as measured by the S&P 500 Index ($SPX), did a complete about-face this week, despite the terrorist atrocities after the market closed last Friday.
The rally has carried back to just above the 20-day moving average. Ultimately, there is resistance from 2115 to 2135, the series of market tops that have been made in the last year.
The stock market has taken on a much more bullish tone since the late- September lows. We had several buy signals on September 30th, and they were well-timed. The bullish case is still strong, even after $SPX has advanced 150 points this month.
We have been having a good amount of success with our event-driven straddles this year – especially with the pre-earnings straddle buys. We have refined that technique through several modifications since we first began by buying the Qualcomm (QCOM) straddle back in late January. I feel that we have a very workable strategy now, but there is one “hole” in it, which we will address in this article.
The $SPX chart remains bearish. During the oversold rally that failed at the 2000 level, an upward trend line had developed on the $SPX chart, connecting the daily lows since the 1870 bottom. That trend line was broken decisively this week, as $SPX fell back below its 20-day moving average. For now, the $SPX chart is bearish as long as it remains below the broken trend line (see Figure 1).
The stock market continues to hover in its trading range. Despite some promising buy signals from sentiment extremes in put-call ratios and $VIX, there was no follow-through by the Standard & Poors 500 Index ($SPX). We have often said -- and still maintain -- that price is the most important indicator. Regardless, as long as $SPX remains in the broad 2040-2135 trading range, the chart is neutral.
The chart of $SPX is the least bullish of the indicators. SPX remains in the 2040-2135 trading range that has bound it for most of this year. Basically this is a neutral chart.
Put-call ratios are much more encouraging. A strong buy signal has been generated by the standard put-call ratio (Figure 2). The weighted equity-only put-call ratio is also bullish (Figure 3).
Market breadth remains mixed, with the NYSE-based indicator now on a buy signal, but the "stocks only" is not.
$SPX now appears to failing at the top of the range, thereby remaining within the 2040 - 2135 trading range. Hence, the $SPX chart remains neutral as long as it's in that trading range.
Put-call ratios are mixed, but generally are in an oversold state. The standard ratio continues to rise and is thus on a sell signal. The weighted ratio, however, has rolled over to a buy signal.
