The rally that could have sprung up at any time – given the oversold conditions that existed – is taking place. As we mentioned in the Volatility Report (overnight), a key factor was the CBOE’s Equity-only Put-call ratio exceeding 1.00 on Friday. That is rare and usually precedes a strong (but short-lived) rally within a day or two. It other indicators don’t chime in today, this move may more or less be the extent of that signal.
The $SPX chart is perhaps the most negative technical indicator of all. The pattern of lower highs and lower lows persists. How far can this next down leg carry? 1100 is the intraday low from last week; 1077 is the overnight low for the futures; and some technical targets suggest a decline to the 1040-1060 area, which was support from the summer of 2010.
The panic of a week ago has subsided, but the market remains nervous and volatile — not as volatile as last week, but far more volatile than it has been in the past year or so. The oversold conditions, massive as they were, have spurred a rally that is still in progress. However, upside progress has stalled, and the bulls and the bears are locked in combat at or near current levels.
The market opened stronger, after some economic data was released, and that rally lasted for less than a half hour. Since then, its been a slow decline, but a large one, and the support at 1180 is in danger of giving way. This would not be good. Specifically, a close below 1178 would spell then official end of this short-term oversold rally that has been underway for the last few days. Thus, the $SPX chart remains in a negative downtrend.
Options for Volatile Markets: Managing Volatility and Protecting Against Catastrophic Risk, the follow up to Richard Lehman and Lawrence G. McMillan's New Insights on Covered Call Writing, is finally available on our website. Considering the current market conditions, the timing couldn't be more appropriate.
Monday was a monster up day – yet another 90% up day. That’s two 90% up days in the last three trading days, which means that the market is short-term overbought and due for a correction of at least one day (S&P futures are down about 10 points in Globex trading tonight). That now makes seven “90% days” – either up or down – in the last 10 trading days.
This decline has been one of the swiftest on record, coming from a period of relative calm and even somewhat positive technical indicators. The selling that has taken place in the last two weeks can only be described as panic selling, for the most part.
$SPX declined sharply below its 20-day moving average (see feature article), and as such is quite oversold.
So far, there is support on $SPX at 1100 to 1120 -- the daily lows of this week.
The market, after some nasty downside fakeouts, finally staged the oversold rally that we – and many others – had been expecting. In slightly less than an hour and a half, $SPX rallied roughly 80 points! Earlier in the day, a rally had been underway also, but it was a nervous one as the market awaited the comments from the Fed after the FOMC meeting.
It is almost unfathomable to think that, exactly a mere two weeks ago, $SPX was at 1345 and there were thoughts that an upside breakout was possible. Now, two weeks later, in a move that can only be described as panic, $SPX is at 1200 with no floor in sight. Oversold conditions have ballooned to near-historic levels in some cases, but as the last few trading days have shown, "oversold" does not mean "buy."
Theoretically, there is $SPX chart support in the 1180-1200 area from last November.