The market, as measured by the Standard & Poors 500 Index ($SPX) broke out to new highs on the Fed’s news that it wasn’t going to taper. That was just over a week ago, and the market pulled back rather quickly after that.
Certain overbought conditions were registered on the 100-point $SPX rally from 1630 to 1730 in just three weeks. However, for the most part, they have not materialized into sell signals. Once again, the bears are on the verge of having dropped the ball when they had a chance for a significant selloff. $SPX now has resistance at the mid-September highs of 1730. There is support at 1680, 1660, and then at the August lows of 1630.
Equity-only put-call ratios are bullish. Market breadth was negative for four out of five days after the market peaked on the Fed news. But the breadth oscillators had previously been so overbought that the four negative days did not produce a confirmed sell signal from either the NYSE-based or the “stocks only” oscillators. A strongly negative day in the next couple of days could probably still produce sell signals here.
Volatility indices ($VIX and $VXO) finally moved below the 15 level when the market was making its highs. Since then, they have been able to maintain at these lower levels. This is another bullish divergence: $VIX has remained below 15, while the market has dropped. The construct of $VIX futures remains bullish.
In summary, the fact that the bears couldn’t complete simple sell signals in breadth and $VIX speaks volumes about their ineffectiveness. But it also doesn’t mean they can’t regroup, so we want to keep a contingent sell signal in place.