Trade Naked » Market Breadth

Still in a Tight Range

Fri, 04 Dec 2009 21:10:23 +0000

Weekly comment on the market from Larry McMillan:

SPX Through 12-4-09

The S&P 500 Index ($SPX) has still not been able to break out of its 1080-1110 trading range on a closing basis. This is a very tight range that has lasted for nearly a month (since November 9th, actually). Our indicators are modestly bullish, so the odds slightly favor an upside breakout.

The $SPX chart remains mostly bullish. The rising trend line connecting the March and October lows is at about 1070 and rising. Coupled with the just mentioned support at 1080, this means that the trend is still bullish. However, a close below 1070 would be problematic for the bulls.

Equity-only put-call ratios have begun to clearly decline and thus generate buy signals. In normal times, we would be encouraged by that fact, but with the distortions caused by the heavy hedging activity since July/August, we still view the signals from these put-call ratios tentatively. These are not our primary indicators at this time.

Market breadth, on the other hand, has been a much more accurate signal during the rally since March. Breadth has given a sell signal each time that $SPX has approached the top of the trading range and then fallen back. Today was no exception, as yet another sell signal has been issued after the $SPX failure to break out on the upside.

VIX Through 12-4-09

Volatility indices have generally declined, with both $VIX and $VXO near yearly lows earlier today. Declining volatility is bullish for the broad stock market.

In summary, $SPX has been unable to break out of the trading range. Perhaps Friday’s Unemployment Report will provide a catalyst for the breakout. Traders should wait for the breakout before taking speculative positions.

[An unexpectedly good unemployment report did send the S&P 500 up 1.5% at 10 AM but it quickly fell back and closed up 0.5% at 1106.]

1080 is Critical

Fri, 20 Nov 2009 18:15:16 +0000

Larry McMillan’s weekly market commentary:

SPX Through 11-20-09

The positive news was that $SPX broke out over 1100 last Monday, convincingly moving well above that resistance level, and doing so with strong volume (a 90% up volume day). The negative news is that the breakout is in jeopardy of becoming a false one. Near-term support exists at 1080-1085.

From an intermediate-term point of view, the $SPX chart remains bullish because the uptrend line connecting the major lows is intact and still rising. Furthermore, the series of higher lows is still intact.

Market breadth has given another sell signal — the third one since November 10th. These repeated sell signals are a sign of the deterioration in the overall market. These sorts of things can persist as tops are “rounding” affairs.

The equity-only put-call ratios have still not completely shaken off the effects of the massive put hedging purchases that have taken place since July, 2009. These ratios have remained in very tight ranges over the past couple of months.

VIX Through 11-20-09

Volatility indices, however, are still quite low. Thus, the trend of volatiltiy remains downward and that is bullish. Even with today’s rather sharp selloff, $VIX was only slightly higher.

In summary, the $SPX chart is intermediate-term bullish as are the volatility indicators, but a close below 1080 would be short-term negative — likely signaling the next correction, as confirmed by the sell signals in the breadth oscillators.

Rangebound to Up Market

Fri, 06 Nov 2009 20:02:36 +0000

Larry McMillan’s weekly summary of the market.

SPX Through 11-6-09

The chart of $SPX has remained bullish since the pattern of higher lows is still in force. The latest correction took $SPX down to 1030. The October lows are 1020. On the upside, there is resistance at 1065-1070, and then above that at the recent highs near 1100.

Equity-only put-call ratios appear to still be feeling the effects of the heavy hedging activity that took place this summer and fall. For the record, the standard ratio is on a buy signal, while the weighted ratio is on a sell.

Market breadth has been a reliable indicator during the rally since the March bottom. The recent correction saw our breadth oscillators reach extremely negative, oversold levels. This week, however, breadth has generally been positive, culminating with a very strong showing of advances over declines today.

VIX Through 11-6-09

Volatility indices spiked up last Friday, as many traders panicked to buy $SPX puts. The rally this week, though, has seen a virtual collapse in $VIX and other volatility indices. Most likely is this: $VIX falls below 25, and the $VIX chart thus once again takes on the appear of a downtrend, which is bullish for stocks.

We view the current market as bullish. We would expect $SPX to exceed the resistance at 1070 (it would be bearish if that resistance held) and challenge the highs at 1100. The wild card is today’s Unemployment Report; if it is negative a $SPX falls back from here, then it would be in a trading range between 1030 and 1070 and we’d have to await a new breakout at a later time. [At 3 PM EST, with an hour to go, the S&P is flat.]

Down But Still a Bull (’Til We Get to 1020)

Fri, 30 Oct 2009 19:24:29 +0000

This is Larry McMillan’s market commentary for this week.

A correction of some ferocity has finally arisen, and it brought out the typical torrents of selling as stock owners all tried to get out the exit door at once. The most damage was done on Wednesday, but the market bounced back today, after positive economic news.

SPX Through 10-30-09

The $SPX chart is still bullish (Figure 1). The October lows at 1020 are a vital support area; a close below there would change the $SPX chart from bullish to neutral, at best. Note that a decline to 1020 would be a serious penetration of the March-July trend line, but that would actually be okay — it would just reset the trendline at a slightly lesser slope. On the upside, there is heavy resistance near 1100, the level which could not be penetrated despite several attempts in mid- October.

Market breadth became extremely oversold this week. While that is a precursor to a buy signal, it behooves a trader to remember that the market can continue to decline during oversold conditions.

The equity-only put-call ratios continue to be distorted by heavy hedging activity.

VIX Through 10-30-09

The volatility indices spiked higher this week, but then moved sharply lower with Thursday’s rally. Only a series of higher highs and higher lows on the $VIX chart would turn the $VIX chart negative.

In summary, the correction that began about a week ago might theoretically continue for a while longer. A breakout above 1100 by $SPX would be extremely positive. On the other hand, a close below 1020 would be negative and should be treated as a serious breakdown.

Next Stop 1120?

Fri, 09 Oct 2009 18:08:04 +0000

The week in review from Larry McMillan:

SPX Through 10-9-09

Last week’s correction (60 $SPX points in a week and a half) had pushed $SPX down to 1020 or so. But, much as was the case a week ago, a strong Monday rally put life back into the bulls. Technically $SPX is in a trading range between 1020 and 1080. However, a close above 1070 would be constructive to the bullish case.

Weighted Equity Only Put Call Ratio Through 10-9-09

The equity-only put-call ratios remain on sell signals. Market breadth suffered during the recent correction, to the point that breadth got oversold. The subsequent rally this week expanded breadth, generating a buy signal.

VIX Through 10-9-09

The volatility indices ($VIX and $VXO) rose during the market correction last week, but have not been able to follow through. As a result, there is “resistance” (if there even is such a thing on a volatility chart) at 30. $VIX was unable to rise above 30, and subsequently closed below 25. That completely negates the potential negatives of last week’s rise in $VIX and once again puts these indicators in the bullish camp. From a longer-term perspective, Figure 4 shows that $VIX has been in a trading range ever since the steep downtrend in $VIX ended last August.

In summary, we continue to view the market as neutral to positive. An $SPX close above 1080 would be bullish confirmation, likely setting off another run to the upside — perhaps to the next resistance area near 1120.

Down 45 – Not Serious – Yet

Fri, 02 Oct 2009 20:28:19 +0000

Larry McMillan emphasizes here the price action of the S&P 500 and the VIX’s behavior.

SPX Through 10-2-09

For the first time since the July lows, $SPX has etched a lower high, lower low pattern. This might not be the start of a serious downtrend, but it is certainly a “warning shot” of sorts. On the first trading day of September, the market plunged and then rallied strongly. The bulls hope that will happen again here in October, but the technicals are not as favorable now as they were a month ago.

As far as the $SPX chart is concerned, there are several levels of support which are important. The first level is where $SPX is right now — at 1030. That is where the market topped in August. Below that, there should also be support at 1010, and then 980-990, at the August and September lows. As for resistance, the major resistance is the 1070 level. Any close above there would put the market back in full bullish mode.

Equity Only Weighted Put Call Ratio Through 10-2-09

The equity-only put-call ratios remain on sell signals. Market breadth has been very strong all along since March, but has now turned negative,as declines have outnumbered advances on 7 of the last 9 trading days. As a result, sell signals have been registered.

VIX Through 10-2-09

Volatility indices ($VIX and $VXO) have been inflated for some time. However, that did not stop them from bolting higher today, and once again they have violated their bullish downtrend lines. Only if a true uptrend develops in $VIX would it be considered a sell signal for the broad market.

In summary, a correction is underway, and it is minor so far (40 $SPX points). So far, indicators have reacted modestly to the decline, as they are expected to do. However, if $SPX 1010 is violated, and if $VIX continues to trend higher, then a more bearish outlook would be warranted. On a more positive note, if $SPX holds at support and perhaps true buy signals are generated by the breadth indicators, then the bulls would assume control once again.

Not the Real Bear

Fri, 25 Sep 2009 18:56:19 +0000

Here is Larry McMillan’s take on this week’s market:

SPX Through 9-25-09

Wednesday’s downside market reversal, coming as it did on the heels of a post-FOMC stock market rally, has caused the bears to become empowered and has seemingly converted quite a few people to the bearish camp in a blink. Little did we know that technical analysis was so in favor!

So, has “the” correction begun? Anything is possible, of course, but there is still plenty of upward price momentum in $SPX. It remains above the trend line that connects the March and July lows. There is support at 1040-1045, the area from which $SPX broke out in July. The rising 20-day moving average is at 1040 as well. So a close below 1040 would be negative, but the major trend line is what truly demarcates this bullish phase, and it is currently near 1000. The equity-only put-call ratios continue to rise. Technically, they are thus on sell signals.

Market breadth has been very strong, keeping the breadth indicators in overbought territory. Today’s negative action, however, has pushed the oscillator down to the brink of sell signals. Previous breadth sell signals during this rally have not been particularly meaningful, as all corrections have been short-lived.

VIX Through 9-25-09

Volatility indices ($VIX and $VXO) both made yearly lows Wednesday morning, before the market reversed downward. The $VIX chart remains in a downtrend and is thus bullish for the broad stock market. A close above 27 by $VIX would break the downtrend, but the four similar previous such occurrences this year have not resulted in a rising trend in $VIX — and that is the only way that $VIX would turn negative.

In summary, a seemingly large number of people have quickly turned bearish with Wednesday’s negative market reversal. However, unless we see some signs of intermediate-term sell signals — most noticeably a break of support in $SPX and a confirmed rising trend in $VIX — we will not be joining the bearish throng.

Stocks Melt Upward This Week

Fri, 18 Sep 2009 18:24:44 +0000

From Larry McMillan the options strategist:

SPX Through 18 Sept 2009

The breakout to the upside this week was virtually a “melt-up,” as stock and option volume were extraordinary. I have never seen speculative statistics such as were generated from Wednesday’s trading. In one of our daily newsletters, Daily Volume Alerts, we noted that on Wednesday over 370 stocks traded double their average option volume (normally less than 100 do). Furthermore, over 100 of those had very strong stock volume patterns and traded at prices not seen it at least the last 100 trading days (i.e., they qualified as breakouts of a sort). Moreover, stocks with extraordinarily strong stock volume patterns — of which there are usually about 2 or 3 in a given day — numbered 42. We have been publishing Daily Volume Alerts for over 15 years, and I have been using similar volume statistics for trading going back over 25 years, and I have never seen a day like that.

Weighted Put Call Ratio Through 18 Sept 2009

Just remember to stay on top of all of your positions. Don’t fool yourself into thinking you’ve suddenly become a genius; don’t confuse brains with a bull market.

The $SPX chart is clearly bullish. The trend line connecting the March and July lows is now at about 980. So a correction could extend all the way back to that level (we don’t expect one will) and the $SPX chart would still be bullish. If there is pullback, it will likely meet support at one of the higher support levels: 1035, 1020, or 1000.

Equity-only put-call ratios remain on sell signals, as they continue to rise.

Market breadth has been extremely strong. This is, as always, a two-edged sword. On the one hand, it’s bullish because so many stocks are participating in the rally. On the other hand, it represents a massive oversold condition that could easily be conducive to sharp, but short-lived corrections.

VIX Through 18 Sept 2009

The volatility indices ($VIX and $VXO) are near their lows, and so the trend of volatility is down — and that is bullish for stocks.

In summary, the intermediate-term indicators are bullish. Overbought conditions indicate that a sharp, but short-lived correction could be possible at any time. Conversely, buyers seem to emerge at the slightest of pullbacks, indicating that there are still plenty of under-invested accounts out there.

Strong Up Trend

Fri, 11 Sep 2009 17:39:00 +0000

Larry McMillan says:

SPX Through 9-11-09

The chart of $SPX is in Figure 1. The dominant factor is the intermediate-term rising trendline, connecting the March and July lows. That trend line is currently at 970, so any corrections that occur but hold above that point would just be corrections in a bullish trend. There is also support at 990 and 980 — the lows of the last two minor corrections. Meanwhile, $SPX broke out to new highs today, making both new closing and intraday highs.

Equity Only Weighted Put Call Ratio 9-11-09

The equity-only put-call ratios generated sell signals a couple of weeks ago, and have more or less clung to them ever since. Market breadth was quite negative for four days, during the last correction (which encompassed about 50 $SPX points, from high to low). But breadth has surged during the last week, and the breadth sell signals that existed have been canceled.

VIX Downtrend Through 9-11-09

The volatility indices ($VIX and $VXO) tried to reverse their downtrends during the last correction, but it was not to be. At this time, they have now both made new lows for this move, and that reaffirms the fact that they are in a downtrend. In turn, that is a bullish indicator for the stock market.

In summary, the fact that the $SPX chart is positive is the dominant feature of this market. Until that changes, there is no reason It would seem that the under-invested institutions will have to get sucked into the market before a meaningful correction can take place.

Is September the Cruelest Month?

Fri, 04 Sep 2009 18:04:13 +0000

My bias is that this rally we are seeing in SP 500 hitting 1016 at 1:30 PM ESST will fizzle out. But I have sold call and put spreads on the index, so I am talking my book. The following shows that there are bearish indicators out there. That bucks up my courage.

This from Larry McMillan

SPX Up to 9-4-09

The bears made a small amount of progress this week, mostly on one large down day on Tuesday. The question becomes, “Is this the beginning of the dreaded, typical September-October meat grinder, or is it just another small overbought correction?” A look at the indicators may help us answer that question.

First — and probably most important — the $SPX chart remains bullish. The trend line connecting the March and July bottoms is intact. It currently sits at about 965 and is rising daily. That is major support. In addition, there is support at $SPX 980, which is the area of the August lows. So, as long as those two support areas are intact, the $SPX chart remains intermediate-term bullish.

Weighted Put Call Ratio 9-4-09 With OEX

That’s the good news. The bad news is that some of the other intermediate-term indicators are on sell signals. Most prominent is the fact that both equity-only put-call ratios are now on confirmed sell signals. This is a major negative factor, as these trusted intermediate-term indicators must be heeded.

Also, market breadth has generated sell signals as well.

VIX Through 9-4-09

Volatility indices ($VIX and $VXO) have been the object of much discussion in the financial media and elsewhere. $VIX popped higher when the market fell this week and broke through its down trend line. That in itself is a bearish sign for the broad stock market. However, this is the fourth time this year that $VIX has broken a down trend line (see Figure 4) and it failed to hold that breakout the previous three times. So, in reality, the $VIX chart would only be bearish if $VIX is truly trending higher.

In summary, the weight of the evidence is bearish at this time, so we expect the $SPX support in the 970-980 area to be tested. If it gives way, then a more aggressive bearish stance would be warranted.