Stocks staged an extremely strong rally yesterday, and S&P futures are up another 15 points in overnight trading. This whipsaw action has left traders and investors alike unsure of what comes next. But the rally improved things greatly from a short-term perspective, and may have had some effect on the intermediate-term as well.
The market remained jittery throughout the week in anticipation of the European "Brexit" vote, and the event didn't disappoint. On the heels of the decision for the United Kingdom to leave the European Union, the S&P 500 sold off tremendously Thursday night. Hence, the market is once again teetering on the important support level of $SPX 2040. Although today's price action is indeed a bit scary, from a longer term perspective the bulls remain in control so long as that support level holds.
Over the past few days, volatility has exploded, but the decline in the Standard & Poors 500 Index ($SPX) has been muted. This is unusual, but not completely unprecedented. We’ll take a look at what this might mean for movement in the broad market, as well as why this is happening. As you might expect, there is more than one theory about what’s causing this aberration.
The market was marching along towards new highs (albeit slowly) when some modest selling was accompanying by a big increase in volatility. The combination now has the market on its heels.
$SPX ran into resistance in the "usual" area between 2100 and the all-time highs of 2135. It has broken support at 2090 and 2080, and now support at 2040 looms large.
Equity-only put-call ratios have continued to remain on buy signals, despite the recent pullback in the broad market.
The recording for Larry McMillan's recent "The Current State of The Market-Predicting Option Indicators" webinar with Cyber Trading University is now available. In the video, Mr. McMillan discusses the chart of the S&P 500, the equity only put-call ratios, market breadth and the volatility indices and what they are saying about the stock market. Watch the video below.
The Standard & Poors 500 Index ($SPX) is nearing its all-time highs. But the progress has been rather slow, especially in light of the fact that all of our other indicators are on buy signals. As you can tell from Figure 1, there is heavy resistance all the way up to the all-time highs at 2135 (upper thick red line). The first support level is 2090, and then 2040 below that.
Stock prices maintained a positive stance throughout yesterday’s session, once again producing new closing and intraday highs for this move. Moreover, these are the highest prices since last July 2015. Still, one has the feeling that the rally should be stronger, instead of essentially inching higher day by day. Overnight, S&P futures are down 8 points, so today might be a down day. There is support at 2090 and then 2040 below that.
After a strong upside breakout last week from the triangle formation (blue lines in Figure 1), the market has spent this week in a tight range. There has been an improvement in the indicators in general, but the most important indicator -- the price chart of $SPX -- has not really responded.
A clear breakdown and close below 2090 would be a short- term negative, likely calling for a retest of support at 2060. A breakout over 2115 and then 2135 would be very bullish.
This article was originally featured in the 5/27/16 edition of The Option Strategist Newsletter.
As you can see from the right, $VXST (the CBOE’s short-term volatility index) is approaching 10. That seems incredibly low, and one would naturally think that it is a warning sign. But the $VXST chart of past two years (below) shows that it’s been at this level a lot – just not since August of 2015.
