Stocks have run into a bit of a roadblock this week, as the resistance in the 2800-2820 area on the $SPX chart has proven to be rather formidable. Of course, it didn't help the bulls that the market had already rallied over 450 points in two months before attempting to challenge that resistance area.
It seems to me that a downside failure would be "certified" if $SPX were now to fall back below its 200-day Moving Average, which is at about 2750 and is still more or less moving sideways. On the upside, of course, a breakout above 2820 would be very bullish, because it would not only force short covering by those who have been selling into the resistance area this week, but it would also bring in sidelined technical money that has been waiting for such a breakout above 2820.
Right now, the only bearish signs we have are the resistance on the $SPX chart and one other sell signal. The equity-only put-call ratios continue to decline swiftly, so they are on buy signals -- and will remain on those buy signals as long as they are declining.
Market breadth has been holding in there fairly well. Even though four of the last six trading days have seen negative breadth, the breadth oscillators have remained on buy signals and have remained in fairly deep overbought territory.
Volatility has declined, but not to the extreme low levels of last year. It seems that there are enough traders who are still concerned about the downside, that there is a continuing stream of buying of $SPX puts for protection. That keeps $VIX a bit elevated, which is fine in a lot of respects. Even so, $VIX is trending downward from the highs of last fall, and that is generally bullish for stocks.
In summary, the indicators are still bullish and are really not approaching sell signals -- although things can change quickly if the market breaks down sharply. But for now, they remain strong overall. So, we remain short-term bullish, but are raising trailing stops and rolling (profitable) calls up to higher strikes.
This Market Commentary is an abbreviated version of the commentary featured in The Option Strategist Newsletter.