In focus: Downtrend persists

By Lawrence G. McMillan

For the first time in quite a while, the bulls seem to have no power. Rallies are weak and quickly fade to new lows. Oversold conditions that, in the recent past, would have generated strong reflex rallies are having no effect at all. So the overall picture is bearish, but those oversold conditions continue to build along with some other buy signals, and so are worth noting as well.

The S&P 500 Index SPX +0.73%   chart is clearly in a downtrend. The breaking of support at 1,310 last week — an event upon which we bought puts — triggered this latest sharp slide. The 20-day moving average (now near 1,325) is trending lower as well.

The one potentially bullish aspect from SPX is that it has fallen “too far” below its 20-day moving average (touching the three-standard-deviation modified Bollinger Band), and that often generates a rally back toward (or just above) the declining 20-day moving average. So far, we haven’t seen anything of such a rally, even though this oversold condition exists. The last time that SPX touched that three-standard-deviation band was at the March lows.

To read the full article, subscribe to The Market Watch Options Trader.