This is the weekly summary from Larry McMillan, the options strategist. See the short video Broad Market Indicators for how the following indicators are used.
SPX 26 June 2009
Two weeks ago, $SPX had apparently broken out over 940 on the upside. However, that proved to be a false breakout, and a setback took the index down to support near 880 (it bottomed at 888 the other day). Thus, both support and resistance have been reinforced, leaving the index in a trading range.
Equity Only Put-Call Ratio 6-26-09
Weighted Put-Call Ratio 6-27-09
As might be expected, the technical indicators are mixed inside the range. The equity-only put-call ratios remain on sell signals. They continue to rise and — from Figures 2 & 3 — you can see that they have a lot of room in which to rise. This doesn’t necessarily mean they are forecasting a huge market decline, though. As we’ve noted before, in 2003 the ratios rose substantially while the general market slowly drifted only slightly lower.
Market breadth has been one of the better indicators in this market — especially the buy signals. The breadth oscillators become officially oversold during this market decline. Then, this week — as of Wednesday’s close — moved to buy signals.
VIX up to 6-27-09
Volatility indices appeared to give sell signals in mid-June — the apparent breakout over the downtrend line and the 20-day moving average. But they proved to be false, as $VIX has declined to its lows. In fact, the breakdown of $VIX to new yearly lows today establishes a new bullish downtrend and thus places $VIX on a buy signal.
In summary, the indicators are mixed, with $VIX and market breadth having quickly swung from bearish to bullish, leaving the equity-only put-call ratios and the $VIX futures premium as sell signals. All of these are valid indicators with good track records. Since they are at odds, it seems to say that the trading range environment will persist.
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