Sell Signals Are Budding

By Lawrence G. McMillan

The bears seemed to have the fight knocked out of them by the big rally from 1820 (on Oct 15th) to here. $SPX moved steadily higher yesterday, and closed at another new all-time high. Meanwhile, the upper 4-sigma “modified Bollinger Band” (mBB) continues to decline because of the decrease in volatility. It is now just below 2021, and with $SPX at 2038, you can see that it’s quite a ways above that Band – in overbought territory, if you will. A sell signal will occur when $SPX falls below the 3-sigma mBB, which is now at 2006. Hence the market could have a “correction” of 31 points and still now generate a sell signal from this indicator. In reviewing past occurrences of the mBB signals, this is similar to May 2013, when $SPX danced above the upper 4-sigma Band for six days and didn’t generate the sell signal until the eighth day; when it finally came, though, the sell signal was a good one, with $SPX 55 points right away, and eventually declining 90 points to the lower 4-sigma Band. Just in case you were wondering, the lower 4-Sigma Band is currently at 1908(!). But that lower Band is rising rapidly – at the rate of almost 10 points per day – as it is being dragged swiftly higher by the rising 20-day moving average of $SPX and the decrease in realized volatility...

This commentary was excerpted from this morning's edition of The Daily Strategist newsletter.