High-volatility standoff

By Lawrence G. McMillan

The panic of a week ago has subsided, but the market remains nervous and volatile — not as volatile as last week, but far more volatile than it has been in the past year or so.  The oversold conditions, massive as they were, have spurred a rally that is still in progress.  However, upside progress has stalled, and the bulls and the bears are locked in combat at or near current levels.

Let’s see how the indicators stack up.  One of the more bearish indicators is the chart of the S&P 500 Index (SPX) itself.  This is in a downtrend, as evidenced by lower highs and lower lows. It did reach oversold levels last week, when it traded an unreasonably large distance below its 20-day moving average.  At the worst, it had dropped more than 8 standard deviations below that 20-day moving average.

Rallies from extreme oversold conditions like that generally carry back to within at least one standard deviation of the moving average.  Since the moving average is now dropping sharply, at the rate of about 7 points per day, so is the location of that one-standard-deviation target.  It currently is 1210, a level which was virtually reach this morning, when SPX had a strong initial rally...

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