The heavy resistance in the 3870-3950 area has repelled several recent rally attempts. This past week, there was one day with a monster rally of over 125 points from one day's low to the next (trading) day's high. However, the last three days have wiped out that rally, and more. That remains as a formidable resistance area. Meanwhile, it seems likely that support at 3700 and perhaps 3630 will be tested. As long as those hold, one could contend that $SPX is trading in a very volatile manner within a relatively wide trading range, from 3630 to 3950, at the edges.
This article was originally published in The Option Strategist Newsletter Volume 5, No. 4 on February 22, 1996.
An understanding of equivalent positions is mandatory knowledge for option traders. Two positions or strategies are equivalent if their profit graphs have the same shape. For example, we have repeatedly stressed that covered call writing and naked put writing are equivalent. This can be quickly verified by looking at the profit graph on the right. Both strategies have limited profit potential, large downside risk, and can make money if the underlying remains relatively unchanged in price until expiration.
$SPX has finally broken down below support. A serious bout of selling occurred yesterday (February 25th), demonstrating for the first time since last September that the bears might actually have some gumption.
Below current levels, there is support at 3700 (the late January lows) and then the major support at 3630 (the Decembers lows). If $SPX falls below 3630, that would be a major bearish development and would probably indicate that we are in a bear market.
No two markets are ever exactly alike, but there are quite a few similarities between our indicators at the current time and where they stood a year ago – comparing the third Fridays of February in each case. As noted in the Market Comment section, that was the last day (February 21st, 2020) before stock crashed into a violent, short-term bear market. There are a lot of similarities. Of course, this article doesn’t compare other periods in history where there were also similarities, yet the market didn’t crash. Perhaps almost every top has some of these similarities.
Despite making new all-time intraday and/or closing highs on February 10th, 12th, and 16th, $SPX is in a fairly tight trading range between 3900 and 3950 -- and has been since the breakout to new highs on February 5th. One thing that has come from this action is that the support at 3870 (the January highs) to 3900 has been strengthened.
One of the cumulative breadth indicators that we follow is cumulative VOLUME breadth (CVB). It is the running daily total of “volume on advancing issues” minus “volume on declining issues.” While it can be calculated using NYSE, NASDAQ, and “stocks only” data, we prefer the “stocks only” (i.e., all stocks on which listed options are traded in the U.S.).