Stocks backed off a little this week most of it on just one day which was a rare interruption of the oversold rally. The pullback left a minor resistance point at 2675 on the $SPX chart. But there is plenty of room between there and the major resistance at 2800-2820. As long as the next local high is below 2800, the $SPX chart will still be bearish. That is, there will still be a pattern of lower highs and lower lows, occurring beneath a declining 200-day Moving Average which is our definition of a bear market.
Last year (2018) was a very interesting year in a number of respects. One of those was the behavior of volatility and especially the behavior of volatility derivatives. Since one cannot trade $VIX but must instead trade one of the listed products – $VIX futures, Volatility ETN’s or ETF’s, or options on those instruments – there are some nuances involved. Since all of those instruments are based on $VIX futures1 , that is where we’ll concentrate this discussion.
The oversold rally has carried farther than many had expected. This is not too surprising, for the market is attempting to fool as many people as it can. We have participated in this rally, in accordance with the buy signals from our various short-term indicators and those indicators are still on buy signals. We thus expect the short-term rally to continue.
We often talk about how the stock market usually trends in the opposite direction from volatility ($VIX). But how do we really measure the trend of $VIX? Often, we use the 20-day moving average, but that is a very short-term moving average that changes trend easily. In a longer-term bull or bear market, we would not want to swing in and out of a “core” position when we are trying to stick with the trend.
Stocks rallied very strongly this week, and the gains that have been registered since Christmas have been spectacular. This has caused most fundamental investors, and especially the headline- chasers, to become very bullish. Do not be lulled into their euphoria.
The $SPX chart is still bearish, as it continues to exhibit a series of lower highs and lower lows, occurring beneath a declining 200-day Moving Average. That is a bear market. There is support at 2350, the late December lows, and there is now resistance 2580-2600, which had been support earlier in the year.
In falling as far as it has, $SPX broke below almost all of the support areas that had been in place. There is now support at 2350 -- last Monday's lows. There was also a bit of support in that area back in the spring of 2017, but that is probably rather meaningless; support that old is not too relevant to a market that has this much momentum and volatility.
The bears have a tight grasp on this market right now, which is a bit surprising since it is so late in the calendar year. Typically by this time, even in bear markets, there is something of a year- end rally.
New post-October lows were established this week when $SPX traded down to 2583 on Monday. That confirms that this is a bear market, in case you had any doubts.
The action in the stock market is getting more volatile, at least in realized terms (implied volatility has not kept pace). The bottom line is that resistance at 2800-2820 has been reinforced, and similarly, support at 2580-2620 has been reinforced as well. The $SPX chart is bearish, in our opinion, as long as $SPX remains below 2820.
