Last week, the S&P was threatening to break below support at 2800. The bulls needed to step up or risk watching the market break below this critical support level and possibly kick off a stronger decline all the way back down to the 2700 level.
But the bulls came through. With the help of a Volatility Index (VIX) buy signal – which I thought would prove false, but didn’t – the S&P 500 bounced off the 2800 level and put on a three-day rally that propped the index all the way up to the 2860 level.
This is where the bears should try to push back.
Here’s an updated chart of the S&P 500…
The index broke down from a rising wedge pattern two weeks ago. That’s what fueled the decline towards 2800. And the bounce over the past few days has brought us all the way back up to the former support line of the rising wedge (the bottom straight blue line).
This is a logical area at which the market should find some resistance and possibly reverse lower.
The bearish viewpoint is supported by the chart of the CBOE Put/Call ratio (CPC) – which closed at 0.79 yesterday. Take a look…
The CPC is a short-term, contrary indicator. It compares the action in calls to the action in put options. A reading above 1.20 shows extreme bearishness among speculators and can indicate a good time to buy stocks for the short term. A reading below 0.80 shows extreme bullishness and could indicate a good time to sell.
The last two previous readings below 0.80 preceded quick declines in the broad stock market.
So, with the S&P 500 approaching resistance and with the CPC showing an extreme level of bullish sentiment among option speculators, aggressive traders might consider adding some short exposure for the next few days.
Best regards and good trading,
Jeff Clark
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