Weekly Stock Market Commentary 5/20/2022

By Lawrence G. McMillan

The stock market continues to decline, reaching new relative lows again this week. The downtrend on the $SPX chart is still in place. For this reason, we are maintaining our "core" bearish position. However, oversold conditions are building, and there will certainly be at least an oversold rally, which will be tradeable.

Oversold rallies usually die out at or just above the declining 20-day moving average, which is currently at 4100 and declining rapidly. Above that, the next resistance level is 4300 where the rallies of April 28th and May 4th topped out.

There is minor support at the recent low of 3858, and more major support at 3700 the lows of the first quarter of 2021. This decline has now wiped out about a year's worth of gains.

Equity-only put-call ratios remain on sell signals, as they continue to rise on their charts (see Figures 2 and 3). They are reaching extreme oversold conditions now. These will not generate buy signals until the peak and begin to trend downward.

Market breadth has improved somewhat over the past week. Even so, the breadth oscillators were so oversold that they remain on sell signals. It is going to take at least one more day of positive breadth to generate buy signals.

$VIX generated a "spike peak" buy signal on May 12th and has now generated another, overlapping buy signal as of May 19th (it traded as high as 33.11 that day, but closed at 29.35). We don't trade the overlapping signals, but in either case, the indicator is our only bullish one currently.

In summary, we continue to maintain a bearish "core" position. As for other indicators, we will trade confirmed buy signals around this bearish "core" position.

This Market Commentary is an abbreviated version of the commentary featured in The Option Strategist Newsletter.