This market has reverted to its old ways, in one respect: there isn't a
whole lot of follow-through from one day to the next. That was its
trademark for most of the early part of this year. However, there is one
major difference between now and then: volatility. Now, the market is
bouncing around with abandon; 10 point moves in $SPX are becoming
commonplace. Previously, though, the moves were small and dull. In
any case, this back-and-forth action has given hope to both bulls and
bears. But the trend is with the bears, and so in our opinion they have
the upper hand until proven otherwise.
This week's action is a case in point. $SPX rallied strongly on
Wednesday, only to fail once again near the 1260 area. That is the same
area that constrained last week's rally, and also is the same general area
that previously had been support for the lows in both February and May.
Once support like that is broken, it then becomes resistance, which is
what it is now. Furthermore, the decline today solidifies 1260 as
resistance once again. So, no matter what the other indicators are saying,
it's difficult to be bullish unless $SPX can clearly close above 1260.
The equity-only put-call ratios are toying with buy signals.
Actually, the standard ratio has confirmed a buy signal (as of two days
ago). The weighted ratio appeared that it would do the same, but then it
spurted to new highs, and so it remains on a sell signal -- still trying to
find that rollover point that would be considered a buy signal. These are
generally strong intermediate-term indicators, but they can't do the job
alone. They need some confirmation from other indicators.
Market breadth (advances minus declines) has been rather poor all
year long, and the recent selling drove breadth deeply into oversold
territory. It is still in that state.
Finally, volatility indices ($VIX and $VXO) have taken a terrible
beating. Both had fallen about 40% from their peaks through
Wednesday's close. That sort of decline is a short-term buy signal,
although the market hasn't really been able to do much with it, except for
a scattering of one-day rallies. In a more negative light, the trend of
these volatility indices is clearly higher (using a 20- or 50-day moving
average, say), and that is negative for the broad market from a longer-
term perspective.
In summary, the massive oversold conditions that we saw in the last
two weeks resulted only in classic sharp, but short-lived rallies that have
stalled out near the 1260 area on $SPX. That is heavy resistance, and the
major trend is still down (as evidenced by the fact that none of the rallies
has been able to penetrate through the declining 20-day moving average
of $SPX). However, if $SPX were to clearly close above 1260, and if
the technical indicators moved to buy signals (which they probably
would: breadth is near buy signals and the weighted put-call ratio could
join in on a rally), then we'd expect to see a short-term rally to perhaps
the 1290 area or so. However, unless things got a lot more bullish on
that rally, we'd still expect to see the bearish trend reassert itself later.
