The stock market was under some pressure entering this week, but a positive intraday reversal on Tuesday has stemmed the bearish tide, and may have turned things bullish once again.
The equity-only put-call ratios are in trading ranges. They gave appropriate sell signals at the end of April and since then they looking like dampening waves with each subsequent high or low.
Market breadth has recovered this week, but the readings on our breadth indicators are neutral.
The market was extremely strong on Wednesday, but it is unclear if it was merely a double bonus of a) an oversold condition, and b) a strong commodity market. We have recently seen the stock market move in conjunction with the commodity markets, and it is possible that Wednesday's move was exacerbated by the big move in commodities. There are plenty of both bullish and bearish signs to gather from Wednesday.
The Standard & Poor’s 500 Index fell to new relative lows this week, finally closing below the 1330 level and trading down to 1318 — which was just about the level of the longer-term bull market trend line, connecting the August 2010 and March 2011 lows. That “touch” of the longer-term trend line, plus some overbought conditions, combined to produce a sharp rally today.
But, the overall picture is a more bearish one, since there is a downtrend now in force on the S&P 500 SPX +0.88% chart.
The stock market is shooting back and forth like a futures contract. In any case, the 1330 level on $SPX remains our bullish demarcation line. A close below there would turn us bearish.
Equity-only put-call ratios had generated sell signals a couple of weeks ago, but those may be fading.
Last week, breadth indicators had generated sell signals. But positive breadth for a few days moved breadth back to a neutral status.
CHICAGO (May 12, 2011) – The Options Industry Council (OIC) announced today Lawrence G. McMillan as the 2011 recipient of the Joseph W. Sullivan Options Industry Achievement Award. This recognition on behalf of outstanding contributions to the growth and integrity of the U.S. options market will be presented to Mr. McMillan at the 29th Annual Options Industry Conference, held at the Westin Savannah Harbor, from May 12-14.
The stock market is shooting back and forth like a futures contract. In fact, the whole market seems to be tied quite directly to the price of oil, silver, gold, and the like. When the market is linked to an unusual “force” such as this, some additional caution is required. At least technical analysis doesn’t care why moves are being made, but rather is just concerned with the price movements themselves.
Ever since we ran an article last fall on selling weekly options, subscribers have been clamoring for (okay, well maybe not “clamoring,” but several have requested) an article on weekly calendar spreads. Of course, in that previous article, we promised a future article on weekly calendar spreads. So the time has arrived to try to tackle what is a far more complex subject than merely selling weekly puts. The calendar spread subject is complex because there are myriads of ways it can be approached – put calendars or call calendars?
On Friday, May 6th, the total put-call ratio (ALL options traded) was above 1.00. That is quite unusual, and when it occurs during a declining market phase, it is normally a strong buy signal. The last time this happened was March 15th and 16th. The market then rallied from 1256 to 1335 over the next month. There are nuances to this, of course, which will be discussed in our newsletters, but this is usually a sign that "too many" people have become bearish and -- by contrarian analysis -- the market should be bought.
$SPX has pulled back to the critical support area at 1330-1340. It's one thing to say that an overbought market might have such a correction, but it's quite another to experience one. If $SPX closes below 1330, that would turn the chart negative.
Nearly all the other indicators that we follow have already turned bearish, which makes things much more negative. Breadth indicators registered sell signals.
The equity-only put-call ratios have generated sell signals as well.
Coming soon as part of the Bloomberg Press Financial series is the latest book by Richard Lehman and Lawrence G. McMillan, Options in Volatile Markets 2nd Edition: Managing Volatility and Protecting against Catastrophic Risk. Below is the book cover and the write-up from the inside jacket cover. We will let everyone know when this book is available.