$SPX continued its phenomenal post-Christmas rally (which to date has registered over 400 points of gains), but has still not broken through resistance at 2820. Unless that happens, the next peak on the chart will still be a lower high, and the $SPX chart will still have a negative tilt to it.
The first signs of bearishness are beginning to creep into the superbly strong rally that has taken place since Christmas. $SPX rallied into the 2720-2740 area this week, which is now resistance and has now backed off. Now we have our first sell signal.
We have written repeatedly about the similarities between the markets of late 2000 and early 2001, ascompared to late 2018 and early 2019. Those comparisons are still valid.
The stock market's new love affair with the Fed continued this week, and the market really took off after the FOMC meeting on Wednesday. $SPX has now broken out over minor resistance at 2675, having gained a whopping 15% since the market's low close on Christmas eve (a mere 26 trading days ago).
The most important resistance is at 2800-2820. There is support at 2620, and then 2350.
Last Friday (January 18th) the “stocks only” breadth oscillator stood at +854.04 – the fourth highest reading of all-time. This is extremely overbought, but is not a sell signal (“overbought does not mean sell”). In fact, in the past, extremely overbought readings have often led to much stronger markets in the short term.
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.