The Fed announced that they weren't planning on cutting rates at this time. That was a "shock" to the media, but probably not so much to traders. In any case, $SPX sold off after that, causing some sell signals to be generated.
Several of our indicators generated sell signals at yesterday’s close – mBB, weighted equity-only put-call ratio, and both breadth oscillators. Stocks had been grinding higher in the morning yesterday, then after the FOMC Meeting, the market sold off, triggering these new sell signals. It appears that the first correction since the brief one in early March could be at hand.
$SPX made a new all-time closing high this week. The $SPX chart is strong and bullish, although the internals as represented by some of the other indicators are not nearly as strong.
There is support at 2890 and 2870, with major support at 2800. It seems to me that a break of 2870 support would be a problem.
The $SPX chart itself is fine. It is rising, with all trend lines moving higher, including the "modified Bollinger Bands." There should be support near 2850, and perhaps even near 2870. Our target all along has been the all-time highs at 2940 and it still is. Unless this market regains some momentum, though, it is going to meet stiff resistance there.
The “mistake” that the market often makes is getting too complacent during rally phases. One of the signs of complacency is extremely low volatility. Part of this is unavoidable as the calculation of historic volatility necessarily yields lower numbers as the market trades at higher prices. Furthermore, short-term implied volatility will not deviate too much from realized volatility, for there are quasi-arbitrage strategies that will be put in place, holding implied volatility down. Longer-term volatilities can remain higher though – not adhering to realized volatility, but normally trading more towards the long-term average volatility of the underlying.
Overall, the $SPX chart is bullish. The trend lines and Bands are all moving higher (even the 200-day Moving Average is edging higher), and the only resistance area of significance is that at the all- time highs -- which should be the next stop.
On Monday of this week (April 1st), $SPX resoundingly broke out to the upside, clearing the 2860 resistance level. That breakout also improved both the put-call ratios and the breadth oscillators, which acts as further confirmation of the bullishness that is being exhibited right now.
As it stands now, $SPX is in a trading range between those extremes of the past week: 2785 to 2860. Indicators have become mixed during this pullback, so probably the best indicator will be price action itself. That is, follow a breakout above 2860 or a breakdown below 2785 as the impetus for the next directional move.
Finally, $SPX has broken out over the heavy resistance at 2820. The breakout wasn't as resounding as expected, and we are in the process of retesting the breakout zone (2800 is the low end of the zone). A close back below that level would be very negative at this time.
Many volatility traders – we are among them – complained about the lack of response by volatility derivatives during last fall’s market decline. That was especially true in the downward thrust in December. $VIX itself managed to put together a decent move, as it rose from 16 in early December to 36 on Christmas Eve. But one cannot trade $VIX; only the $VIX derivatives are available for trading.