The S&P 500 Index (SPX) is currently experiencing a defined downtrend, and it is important to maintain a bearish stance in this market. Despite oversold conditions, it is essential to remember that “oversold does not mean buy.” There have been no confirmed buy signals yet, even though there are potential buy signals in various areas.
It is crucial to recognize that the stock market can still decline significantly even when it is oversold. Historical examples such as October 2008 and March 2020 demonstrate this phenomenon. The SPX’s series of lower highs and lower lows clearly indicate a defined downtrend, represented by the red lines on the accompanying SPX chart.
There is resistance at 4330 (the previous support level) up to 4400, where a gap exists on the SPX chart. While oversold rallies can occur at any time, they are typically short-lived and tend to fade once they reach the declining 20-day Moving Average, which is currently at 4380 and dropping rapidly. These numbers represent significant resistance to any rallies. The previous resistance points at 4540 and 4600 are still present, but they are insignificant as long as the SPX remains in its downtrend.
Support near 4200 is significant as it was previously a resistance level (blue line on the chart). Additionally, the still-rising 200-day Moving Average of SPX is near 4200.
The SPX has consistently closed below its -4 “modified Bollinger Band” (mBB), indicating an oversold condition that could set up a future “classic” mBB buy signal. This buy signal would be confirmed if the SPX closes above its -3 Band, which would require a close above 4267. However, further confirmation would be necessary to complete the McMillan Volatility Band (MVB) buy signal.
Equity-only put-call ratios are increasing as put volume rises significantly after the market fell below the important support level at 4330. Both equity-only ratios are currently on sell signals and will remain so until they start trending lower. The rising total put-call ratio has also reached oversold territory, and it will generate a buy signal when it rolls over and forms a local maximum on its chart.
The CBOE equity-only put-call ratio was above 1.0 on October 4, indicating a rare oversold condition that, if repeated within the next five trading days, could serve as a buy signal for the stock market.
Breadth indicators have been negative, which is expected when the SPX is trading below the lower bands. Both breadth oscillators remain on sell signals, but they are deeply oversold and will generate buy signals once there are at least two to three days of positive breadth.
The NYSE-based “New Highs vs. New Lows” indicator remains on a sell signal as New Lows continue to dominate. Some stocks hitting new lows are trading at prices almost as low as those in March 2020. This indicator will only turn bullish once there are 100 or more New Highs on the NYSE for two consecutive days.
The volatility complex has been the most bullish indicator throughout the year, although its strength is currently wavering. The VIX is in “spiking” mode, which often leads to sharp declines in stocks. A “spike peak” buy signal will be issued when the VIX drops at least 3.0 points from its peak, but that has not yet occurred. The highest VIX “print” during this spiking period has been 20.88 so far.
The trend of the VIX buy signal that appeared in November 2022 has been stopped out, as the VIX is currently above its 200-day Moving Average while the 20-day MA is below it. If the 20-day MA crosses above the 200-day MA and the VIX remains above the 200-day MA, it would indicate an intermediate-term sell signal.
The volatility derivatives market is a cause for concern. As long as the term structures of VIX futures and CBOE Volatility Indices slope upward, the market remains stable. However, if the VIX futures term structure flattens or if the front-month October VIX futures rise above November, it could be a highly bearish warning sign. Similar scenarios in February 2018 and February 2020 resulted in market collapses within a week.
In conclusion, it is advised to maintain a bearish position in the current market conditions. Other confirmed signals will be traded accordingly.
Sources:
– Lawrence G. McMillan, author of the source article.