Everyone Wants to Sell at Once

By Lawrence G. McMillan

As is so often the case, everyone wants to sell at once. That happened yesterday, with $SPX down 127 points at one time. But it rallied strongly after 3:15pm, and continued to rally overnight. We’ve seen this story before: the one day wonder bear market followed by another month of rising prices. Somehow, that seems all too convenient, but it could be happening again. Let’s work through the indicators, which are all over the place at this time.

First the $SPX chart has broken support at 4370, which was a major support area. That alone accounted for a good deal of the heavy selling early yesterday. There is now a big gap on the chart, up to 4430. If that gap is filled, and $SPX closes above there, the negative effects of yesterday’s breakdown would be reversed. Hence, that is the stop for the bearish spreads we bought on the breakdown. There is technically resistance from 4430 up to the justnow-beginning-to-decline 20-day moving average at 4490 or so.

$SPX closed below the –4F “modified Bollinger Band” (mBB) yesterday. That means two things: 1) the previous McMillan Volatility Band (MVB) sell signal has reached its “target” and should be closed (note that the previous sell signal – in mid-July – occurred at a level which was slightly below yesterday’s close. So, the sell signal, while successful in sense that $SPX reached the –4F Band, was not a winning trade). And 2) a new MVB buy signal will set up when $SPX closes above the –3F Band. Merely closing above that Band is a “classic” mBB buy signal, but the MVB buy signal requires further confirmation. In any, the “classic” signal would occur today on a close above 4398.

The 20-day realized volatility of $SPX (HV20) has risen to 10%, and so that is a new sell signal based on realized volatility. I would expect HV20 to continue to rise as the old data from 20 days ago falls out of the calculation. However, if HV20 should fall back below 9%...

This Market Commentary was excerpted from this morning's edition of McMillan's Daily Volume Alerts Newsletter. To read the full article, subscibe today.