By Lawrence G. McMillan
Last Friday, the market broke down through support – and did so in a big way. This current breakdown has changed the status of the $SPX chart from “bullish” to “neutral” at best. One could make a case for $SPX now being volatile within a trading range of 2120 to 2160. But if that 2120 support area is taken out, the chart will definitely be in a “bearish” status.
Equity-only put-call ratios have been on sell signals for a couple of weeks, and they were our only consistently bearish indicator prior to the breakdown. They have been rising steadily all week, as put buying has dominated call buying – even on rally days. Thus they remain on sell signals, but they are just getting started it seems, for they have a long way to run before they reach oversold territory.
Market breadth has bounced back and forth wildly in the past five trading days. There have been two 90% down days – and in “stocks only” terms they were true 90% down days, in both issues and volume. It is a negative for the market if there are “too many” 90% days in a short period of time. Generally, that means that volatility is rising, and even though there are positive days here and there, the overall picture is getting more negative. At this point, we have only had two 90% days recently, so that is not “too many” – yet.
In a larger sense, both breadth oscillators are now on sell signals, but they are not in oversold territory yet. The rally days have kept the oscillators from dipping into oversold territory. Hence, they remain on sell signals.
$VIX had been in a trading range as well and had not closed above 14 since early July. That ended last Friday, when $VIX and other volatility measures exploded to the upside. That close above 14 generated a sell signal from $VIX. The trend of $VIX is now higher as higher lows were registered for four days in a row, and that is bearish for stocks. What has remained bullish, though, is the construct of the $VIX futures and of the CBOE Volatility Indices.
In summary, the picture has turned somewhat bearish with $SPX breaking support at 2160. We have repeatedly said that we were remaining bullish as long as $SPX remained above support, but we would change that stance if support were broken. Well, support has been broken and so we are changing our stance to “sell on rallies.” If the support at 2120 were clearly to be broken, an even more aggressive bearish stance would be warranted.
This Market Commentary is an abbreviated version of the commentary featured in The Option Strategist Newsletter.
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