Weekly Commentary 10/19/12

By Lawrence G. McMillan

A week ago, stocks seemed to be on the brink of breaking down. But the bulls regrouped, and $SPX rallied strongly off of that support base. Hence, the 1425-1430 area is now stronger support than ever.

Equity-only put-call ratios are the most bearish indicator of the lot.  They continue to rise rapidly, after having given sell signals last week.  Since they are still rising, they are still on those sell signals.

Market breadth indicators are hovering right on the edge of sell signals.

Volatility indices ($VIX and $VXO) have remained subdued in recent weeks, even when the stock market declined last week. As long as $VIX is below 17, the stock market should be able to to move higher.

In summary, the fact that the market bounced off of support this week was very bullish.  But $SPX now needs to challenge and exceed the resistance at 1475 in a relatively short time, in order to keep the momentum going.  Regardless, a breakout of the 1425-1475 range will likely lead to a further move in the direction of the breakout. 

Sign up for The Option Strategist Weekly Updater to receive this market commentary delivered to your inbox each Friday for free.