Everyone was worried about the FOMC announcement this week, but it turned out to be benign. But, on Thursday President Trump tweeted that there would be more Chinese tariffs. Whether the market over-reacted to this tweet or whether there were just a lot of traders looking to lighten up, a torrent of selling was unleashed.
In Figure 1, you can see that I have connected the September 2018 and April 2019 tops, which were both roughly in the 2940-2950 area. Now we have pulled back to that level. If $SPX drops below there and continues lower, there is a possibility that the entire trading of this past month could be considered a false upside breakout.
The equity-only put-call ratios rolled over to sell signals this week before the tweet happened. Once these ratios begin to rise, as they have, they will remain on these sell signals as long as they are trending higher.
Market breadth has been a bit of problem for weeks. So both breadth oscillators are on sell signals, but not yet in oversold territory.
Volatility rose a bit on Wednesday, after the FOMC report, and then exploded on Thursday after the tweet. $VIX closed above 17, the level at which we have been noting as the point at which the $VIX chart would become bearish, for $VIX is now in an uptrend.
In summary, the market is on the brink of another correction or worse. If $SPX closes below the old highs at 2940-2950, the $SPX chart would turn bearish.
This Market Commentary is an abbreviated version of the commentary featured in The Option Strategist Newsletter.