Weekly Stock Market Commentary 10/21/2022

By Lawrence G. McMillan

Deeply oversold conditions have spurred another rally attempt over the past week. $SPX made a trading low near 3490 on Wednesday, October 13th, and then early this week a strong rally took place. This rally generated some buy signals from our oversold indicators, but there has been no follow-through. The rally peaked at 3760 and has fallen back. There is fairly heavy resistance in the 3750-3800 area, which is where the most recent "island reversal" (circles on the chart in Figure 1) took place. Furthermore, the rally exceeded the declining 20-day Moving Average by a small amount, and then began to struggle. That is the classic action of an oversold rally.

This is still a bear market, as defined by the patterns of lower highs and lower lows on the $SPX chart. Thus, even if this rally extends further (a close above 3800 would be very positive), it would still be a bear market rally, in my opinion.

There has been some interesting activity in the equity-only and Total put-call ratios over the past week. The ratios have peaked at very high levels on their charts and thus issued buy signals.

Breadth oscillators moved into buy signal territory for one day (October 18th, after the large 2-day rally), but could not maintain those levels. So, they are back on sell signals once again.

$VIX peaked at 34.53 on October 12th and has been slowly retreating ever since. That has produced a new $VIX "spike peak" buy signal. So, $VIX has a short-term positive indicator. But, it also has a more intermediate-term negative indicator, and that is the trend of $VIX. As noted on the chart in Figure 4, the trend sell signal occurred in mid-September.

In summary, we continue to maintain a "core" bearish position, in line with the trends of $SPX (downward) and $VIX (upward). However, we also continue to trade confirmed signals around that "core" position, so we have several bullish positions in place, too.

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