The Option Strategist Newsletter $29 trial


By Lawrence G. McMillan

The latest attempt at an oversold rally appears to be over with very little to show for it. the rally barely reached the declining 20-day Moving Average of $SPX. Typically, oversold rallies overshoot that declining 20-day MA, so this was a particularly weak rally attempt.

The trend of $SPX is still downward, and the pattern of lower highs and lower lows continues to dominate the $SPX chart. In short, this is still a bear market.

Equity-only put-call ratios have not confirmed new buy signals. Frankly, since the ratios are/were so high, I fully expected them to drop again, but they have not. So they are on sell signals, and won’t re-confirm buy signals unless they drop below the early-June lows.

Market breadth has been better than usual since the June 16th lows. Even so, the breadth oscillators failed this week and now the most recent breadth oscillator buy signals have been stopped out. They are sitting at oversold levels once again, and it won’t be hard for them to generate new buy signals, but it will take at least one and probably two days of strongly positive breadth in order to do so.

Meanwhile, $VIX continues to meander in the general area of 30 whether the market goes up or down. $VIX has certainly not reflected the strength of this bear market in stocks, as it has not even climbed above 39. But I suppose that indicates that there is a relative balance between buyers and sellers of $SPX puts at implied volatilities in the 30’s ($SPX puts are often the main drivers of the price of $VIX, especially in bearish markets).

In summary, we are maintaining a “core” bearish position. We will, of course, trade oversold buy signals around that “core” position, although that has not been very productive. Eventually, one of these oversold rallies is going to be much stronger — strong enough to make the bears questions their resolve. Bear markets usually make things difficult for both bulls and bears.

This Market Commentary is an abbreviated version of the commentary featured in The Option Strategist Newsletter.


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