As $SPX has approached the all-time highs, some selling has appeared. This is understandable, as many traders probably figure they are grateful to have gotten "even" and are looking to reduce exposure, considering that the future could be volatile and uncertain. However, our indicators remain bullish, and we expect further upside progress.
The market, as measured by $SPX, moved to new relative highs this week, finally breaking out over resistance at 3280. From there, it quickly moved to 3330, closing the huge gap down that had been left on the chart from when the bear market began on February 24th. Now, it has its sights set on the all-time highs at 3395, which is the last remaining resistance area. After this week's action, a close back below 3200 would be cause for concern.
This article was originally published in The Option Strategist Newsletter Volume 15, No. 10 on May 25, 2006.
As the market has declined, $VIX has risen dramatically. As owners of $VIX futures – now joined by owners of $VIX calls – have come to expect, though, the futures and options have not followed $VIX higher. This has generated a torrent of frustrated and sometimes nasty email to us. Owners of these products are incredulous as to how this can continue to be. We have explained the process at length, but we agree that something does not seem right here. So we decided to take a much closer look. Doing so involves getting into the very arcane formula for $VIX (if you care, it is published in a “white paper” on the CBOE web site).
Every so often, we take a look at cumulative breadth and volume, when they appear to have something to “say.” This could be one of those times, as cumulative volume has already made a new all-time high (in “stocks only” terms) as has cumulative breadth.
First, some definitions and nomenclature:
Cumulative breadth (CB): the running daily total of advances minus declines.
The stock market has remained in a fairly tight range ever since breaking out over resistance at 3185 in mid-July. This has had the effect of reducing realized volatility (more about that later), as well as frustrating both bulls and bears. There is overheard resistance at 3280 (the July highs) and there is support at 3185 and below that, at 3155.
Stocks have managed to overcome each resistance level with some effort but have not been able to accelerate to the upside. $SPX has encountered resistance at 3155, 3185, 3235, and now 3280 (or just below). Hence the advance has been -- choose your favorite adjective -- labored, halting, tired, or merely stairstep. Whichever one you choose, none have resulted in a strong breakout. But the $SPX chart will remain bullish until support in the 3100-3130 area is broken.