By Lawrence G. McMillan
Now that $SPX has broken out of the extended trading range (essentially 3800-4200, which lasted for over six months), it is gaining momentum as traders are trying to "catch up." This is beginning to create overbought conditions, but "overbought does not mean sell."
The current breakout not only overcame the resistance at 4200 (which was the top of that range) but also has now exceeded the resistance at 4300, which was the high reached last August. Both of those areas should now provide support, although they are quickly fading into the distance so that a pullback to that support would be a large one.
Equity-only put-call ratios continue to plunge, which means they remain on buy signals. They are very low on their charts at or below areas where previous strong sell signals emerged. That makes them overbought, but they won't be on sell signals until they roll over and begin to rise.
Breadth has been a bit flaky, but at the current time both breadth oscillators are on buy signals and are in overbought territory. Small cap indices ($RUT; IWM) are nowhere near as strong as any other major Index, and neither is the Dow ($DJX; DIA). This is a minor negative.
$VIX has plunged as $SPX has rallied, but it is still holding in the 14 area. That is more in line with a bullish market, and it is the lowest level of $VIX since January 2020 -- right before the pandemic. I'm not sure one can say that $VIX is "overbought" at this level, but it's not far from it. Even so, a low $VIX is not in and of itself a sell signal.
Overall, we continue to maintain that a "core" bullish position should be held. Other indicators can be traded around that. Since the market is somewhat overbought, one should roll long positions up and/or tighten trailing stops.
This Market Commentary is an abbreviated version of the commentary featured in The Option Strategist Newsletter.
© 2023 The Option Strategist | McMillan Analysis Corporation