Weekly Stock Market Commentary 11/6/2020

By Lawrence G. McMillan

Election-related or not, the move from the bottom to the top of the $SPX trading range in just four trading days was impressive. The trading range extends from 3200 to nearly 3600 (the all-time highs at 3588). The recent moves have pretty much obliterated what had been a support and resistance area near 3400-3430, so the edges of the range itself are the only meaningful support and resistance currently.

Equity-only put-call ratios remain on sell signals, despite the huge rally over the past four days. They are still moving higher, although there is a "wiggle" in the weighted chart in Figure 3. The computer analysis programs say that that wiggle is meaningless and that sell signal remains intact.

Market breadth has improved strongly this week, and both breadth oscillators are on buy signals -- those most recent buy signals having come at the close of trading on November 2nd.

Implied volatility is struggling to serve two masters -- market movement and expected post-Election machinations over the vote count. Yes, $VIX has fallen during this rally, and the concomitant $VIX "spike peak" buy signal of October 30th remains in place. But $VIX is still in the high 20's and its 200-day moving average continues to rise. If $VIX and its 20-day MA were to cross above the 200-day MA, that would be an intermediate term sell signal for stocks.

In summary, $SPX is range-bound and volatile. Whatever the reasons for the moves (stimulus or no stimulus, blue wave or no blue wave), they have been violent. A strategy that works in such situations (until it doesn't) is to "fade" the range: that is, sell near the top of the range and buy near the bottom, figuring that you will be stopped out if a true range breakout occurs. In any case, we plan to continue to trade confirmed signals as they occur -- both bullish and bearish. Eventually, a range breakout will take place, and we will trade that as well.

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