Weekly Stock Market Commentary 8/31/2018

By Lawrence G. McMillan

On the first four days of this week, $SPX closed at a new all-time high each day. It was accompanied by strength in the other indicators to confirm the breakout. However, some overbought conditions are beginning to appear.

Some specifics: there should be support at 2860-2870, which is the area of the old highs. But the most important support area is 2800, which has been an important level all year long. Even more so, it is also near the lower edge of the trading channel (blue lines - Fig. 1), so a violation of 2800 would be a violation of the channel, too.

Somewhat ironically, the equity-only put-call ratios have finally rolled back over to buy signals this week. That is, the heavy put buying that was taking place during the August rally has abated, and call buying has resumed.

Market breadth remains an interesting component of current market analysis, in a couple of ways. First, there are the breadth oscillators, which are on buy signals. Second, the CUMULATIVE advance- decline lines are making new all-time highs as well.

Volatility should be a useful indicator, too. One might wonder why I would say that, since it seems to be locked in a dull, trendless mode. As long as $VIX remains dull and trendless, that is good for stocks, but if $VIX breaks out to the upside -- above 15, say -- then that is a warning sign.

Finally, the subject of seasonality should be discussed. September is a bad month for stocks, in general. In fact, the worst month (October has had more large intra-month declines probably, but it is often the case that the market recovers by the end of October). While we wouldn't necessarily take a bearish position against this generally strong market merely because of seasonality, one should be aware that selling often begins right after Labor Day and can continue into a (sometimes nasty) October low.

In summary, $SPX has recently made a series of new highs, and that is a bullish sign. The $SPX chart is positive and it is the most important indicator. However, a number of disturbing signs are setting up. But one cannot act on the potentially negative indicators until sell signals are confirmed. Overbought does not mean "sell."

This Market Commentary is an abbreviated version of the commentary featured in The Option Strategist Newsletter.

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