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

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

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.

Last week’s indicator review concluded that “Friday’s price highs in the major indexes were not confirmed by fresh highs in the 65-day high/low measure, an indication that the rally may be in for a period of consolidation. As long as we stay above the May highs in the S&P 500 Index, however, one has to respect the sustained buying displayed by this market.” During the subsequent week, we did indeed see range trade and consolidation, followed by Monday’s weakness. That weakness took us below May’s highs, raising the possibility that much of the June strength was a head to May’s shoulder.

Even before Monday’s decline, we saw a drop in trend strength among the S&P 500 sectors, as well as poor relative performance from three key sectors. Although Friday closed at a bull market high, we saw non-confirmations from the number of stocks making fresh 65-day highs vs. lows (middle chart) as well as reduced upside momentum (top chart). While the advance-decline line for NYSE common stocks did register a fresh bull peak early in June, it did not for the S&P 600 small caps (bottom chart, much credit to Decision Point). This once again highlights the distribution occurring at the June highs.

So where do we go from here? On Monday we registered 391 new 20-day highs among NYSE, NASDAQ, and ASE stocks, against 768 new lows. As long as new lows exceed new highs, we have to look at this as a potential trend shift that could take us well into May’s trading range. The key is holding below those May trading highs: if June’s trade amounts to a false breakout, we should stay within May’s range and trap the June bulls. A move back into June’s prior range and above May’s highs would set up a fresh set of range bound conditions.

As always, I will be following the indicators each day before the market open so that readers can gauge market strength and weakness. Those indicators are posted via Twitter; subscription via RSS is free, or you can check out the five most recent tweets on the blog page.
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