Weekly Stock Market Commentary 8/21/2020

By Lawrence G. McMillan

The S&P 500 Index ($SPX) finally made a new all-time closing high this week, both intraday (Aug 18th and 19th) and closing (Aug 18th). This was cause for selling in some circles. As we've noted before, this is understandable in terms of the investor who says "Whew! I'm finally back to even," and sells. We have seen these little resistance areas since mid-May, and each time $SPX has been able to overcome them and move to new highs.

However, the $SPX chart is still bullish at this time. It is in a rising trend (it hasn't even closed below its rising 20-day moving average since late June). That 20-day moving average is at 3322 and rising -- near the first support area on the chart (3325, which was the low a couple of weeks ago). Below that there is further support at 3280 and 3200.

Equity-only put-call ratios continue to remain at very low levels. At this point, I still wouldn't say these are on "confirmed" sell signals, because their daily readings are quite low (same for the CBOE equity-only). Confirmed sell signals would arise when these begin to rise sharply, as they did last January, and then even more strongly last February.

Market breadth has deteriorated a bit this past week. As a result, both breadth oscillators are now on sell signals. That is a minor negative, for we have seen them weaken before, without having much meaning to the trend of the overall market.

Volatility remains bullish for now. The trend of VIX is an intermediate-term bullish mode as long as $VIX and its 20-day moving average are both below the 200-day MA. The blue circle on the chart in Figure 4 shows where this bullish crossover was initiated, and it remains in place. The opposite occurred back in February (pink circle on the chart).

In summary, there are some potential sell signals setting up, and we will be trading them if they are confirmed. However, one must remember that the $SPX chart is still positive, and that is the most important indicator. Sell signals from other indicators can come and go, but if the $SPX chart does not break support (3200, in this case), then the price trend will remain higher. So, there are some cracks appearing in the dam, and while it's not time for panic, you better have Hans Brinker on speed dial.

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