Bears remain in control below $SPX 1400-1410 level

By Lawrence G. McMillan

Today's early market action was a continued grind higher as further shorts were forced out of their positions.  $SPX made the intraday high just below 1390, the upper end of resistance from 1380-1390.  Around 1:00pm EST the Fed Chairman finished up a speech that apparently the market didn't enjoy.  This triggered a wave of selling that brought the market down.  Despite the sharp midday selloff, we still believe this rally may have some more room to the upside, likely a test of firm resistance in the area of 1400 and slightly above.

Equity-only put-call ratios finally broke the strong uptrend (bearish for stocks) they had been in for nearly two weeks.  Both the moving averages “wiggled” today, while a positive sign, this by no means triggers a buy signal quite yet.  The Total put-call ratio has not yet moved back below 0.90 (nor has it peaked for 10 days) and therefore has not yet given a buy signal, either.

Market breadth is just slightly negative as things stand now.  Yesterday was a "90% up volume day" which rolled both of the oscillators to buy signals.  That said, a "90% up day" is not only a slight negative in the very short term, it also falls in line with an intermediate-term bearish outlook first brought to light in last week's issue of The Option Strategist.  This occurs when there have been no "90% days" for a period of 50 days or more and then they begin to appear.

Volatility indices ($VIX and $VXO) are fractionally higher today.  The sharp move in $VIX below 16 yesterday was bullish in that it was a break from the 16-19 range as well as triggered a 3-point spike-peak short term buy signal for stocks.

$VIX futures are very mixed today as the November contract will coming off the board (expiring) at tomorrow's open.  The futures construct remains generally bullish for the stock market.

In summary, the bullish and bearish indicators have about balanced out at this point.  The bottom line is price action, the end-all be-all indicator, remains in the bearish camp.  There is firm resistance in the area of $SPX 1400-1410 and a move above that level would lend credence to the bullish argument.  Otherwise, the bears remain in control.

This market commentary was taken from this afternoon's edition of The Daily Strategist Newsletter.