Opinion: S&P 500 charts point to more losses in the stock market

The bulls tried to engineer some of the recent oversold rally, but it turns out that they were one-day affairs that – while looking amazing for one – didn’t have the staying power. It happened on April 28 and May 4.

Currently, the 20-day moving average is at 4240 and is rapidly declining. Furthermore, these two one-day walks topped out near 4300, so the general area of ​​4240-4300 presents resistance.

So far, SPX has not set up a new buy signal for the McMillan Volatility Band (MVB), because it did not close above 4308. It would set up a new signal at lower levels if it could close below the -4σ “adjusted Bollinger Band.” It was not able to do so.

Indeed, SPX was “walking” the narrow lane between the -3σ and -4σ bands. These ranges are dropping more quickly now because the realized volatility has increased significantly. The historical (realized) volatility of the S&P 20-day index is 31% – a very high level.

The buying ratios in the stocks only continue to rise sharply, meaning that they are still on the sell signals. They will only generate buy signals when they roll over and start to fall. This is the highest level they have reached since March 2020, and they are definitely in oversold territory, but they are yet to reach the buy signals.

Meanwhile, the total buy-to-be ratio finally registered a reading above 1.00 in one day over the past week. A buy signal from this indicator usually does not occur until the 21-day moving average reaches 0.90 or higher. At this time, it’s 0.837 – so it’s nowhere near a buy signal either.

The breadth of the market was poor, as one might imagine. There was another “90% drop day” on May 5th. Both oscillators are widely sold as sell signals and are heavily oversold. These oscillators are located roughly at the same levels as they were in late January, when the selling spike occurred – but the market psychology was much more bullish in late January than it is now.

In any case, it will take at least two or three days of positive supply (i.e., more advances than dips) for these things to pull back to buy signals.

New 52-week lows continue to erode 52-week highs. Just one day this week saw 5 new highs on the New York Stock Exchange. This indicator is still bearish and deeply oversold. It will take two days as new highs cross new lows on the NYSE to turn this upward trend. This could happen sooner than one might think, but it doesn’t seem to be in the cards at this time.

VIX’s latest “peak high” buy signal has been discontinued, but this also means that VIX VIX,
+ 0.09%
Returned to “escalation mode”. Thus, a new “peak high” buy signal will be generated soon. This indicator is very sensitive to oversold reversals, and therefore it is usually one of the first bullish indicators in a falling market.

So far, though, recent signals have been losing signals (the blue “B” on the accompanying VIX chart is losing “peak” longs, but the system we use to trade this indicator is). This is fairly standard procedure during bear markets, and the last time it happened was March-April 2020.

The trend of VIX is still down for stocks, as both VIX and the 20-day moving average are above the 200-day moving average. This will only be interrupted by a VIX closing below 200 days, which won’t happen anytime soon, given that 200 days are around 22 (and slowly rising).

The somewhat volatile derivatives composition has turned negative in its stock market outlook, and it is struggling to avoid turning dangerously negative. The front month May VIX futures are trading partially higher than the June futures contracts. If May rises more than 1.00 pips above June, this will generate a more serious sell signal.

Meanwhile, the VIX futures term structure slopes down modestly, which is another moderate negative for stocks. If the term reverses sharply, it will produce a medium-term sell signal for the stock.

Overall, VIX and its derivatives have not responded in the way one would normally expect in a bear market. VIX has not yet achieved above 40, and the term structure remains relatively flat. This happens sometimes – notably in February and March of 2009, when the VIX held steady (albeit at 55) while the stock market fell to bear market lows. A less serious but similar case occurred in December 2018 as well.

In short, we continue to maintain a “basic” bearish position and will do so as long as the SPX (down) and VIX (up) trends are in place. We will trade oversold buy signals around this “core” position, but only if they are confirming signals.

New Recommendation: VIX Possible ‘Peak High’ Buy Signal

The highest price VIX reached since the previous buy signal was stopped was 35.48 on May 9th. A new “peak high” VIX buy signal will occur when VIX closes at least 3.00 pips below its highest price, using the May 9 price and beyond.

If VIX closes at least 3.00 pips below the highest price reached from May 9 onwards,

Then buy 1 SPY June (17^y) at-the-money call

The sale of 1 spy June (17^yCall an amazing price 20 pips higher.

New Recommendation: Black Knight (BKI)

takeover offer from Intercontinental Exchange ICE,
+ 2.05%
Accepted by Black Knight BKI,
+ 0.23%
It was supposed to be “worth” $85. In fact, that’s even less, because part of the deal is for ICE shares, which have fallen since the deal was announced.

Digging through the press release, it appears the deal is 80% cash at $63.20, plus 20% in ICE stock. So the trade is 63.20 + 0.2 * ICE, which is valued at $82.11 with ICE trading at 94.55. BKI is trading at 69.34, which is a very wide spread. So we will buy BKI calls, and look for the spread to narrow it.

Buy 3 BKI Jun (17^y70 calls

at 2.50 or less.

BKI: 69.44 June (17^y70 calls: available at 3.00

We will hold out without stopping at first.

follow the movement

All breakpoints are mental breakpoints unless otherwise noted.

We will implement a “standard” rolling action for our SPY spread: on any vertical bull or bear spread, if the underlying hits the short, roll the entire spread. That will be a roll above In the event of a bull call spread or roll under In the event that bears spread. Stay at the same expiration, and keep the distance between strokes the same unless otherwise instructed.