The S&P 500 (SPX) is currently consolidating after a significant upward surge over the past three weeks. The index has been oscillating between 5,560 and 5,650 in recent sessions, signaling an imminent breakout that could set the stage for a substantial move in either direction.
Key Levels: Resistance, Support, and Market Sentiment
At the top, resistance looms near the all-time high of 5,670, which remains a critical threshold for traders. A sustained move above this level, particularly with two consecutive closing days, would suggest robust bullish momentum. On the flip side, support sits around 5,370. A break below this point would likely signal a deeper correction, making it an essential level to monitor.
Volatility Bands and Put-Call Ratios: Diverging Indicators
The McMillan Volatility Band (MVB) buy signal is still intact, with a target set at the +4σ Band, currently positioned at 5,750. As the bands continue to narrow, this suggests that realized volatility is gradually stabilizing. Meanwhile, equity-only put-call ratios have turned bullish, although this shift has been slower than usual. This delay can be attributed to strong put buying early in the rebound off the August 5 lows. These signals remain favorable for stocks unless they reverse.
Market Breadth and Volatility Trends: Mixed Readings Ahead
Market breadth, which had been a strong tailwind for stocks, has recently shown signs of weakening. The breadth oscillators, which have been in bullish territory, are now at risk of rolling over to a sell signal if negative breadth persists for another day. However, NYSE breadth remains more robust than stocks-only breadth, which could offer some support against bearish signals.
Realized volatility is starting to recede. The 20-day historical volatility of the SPX (HV20) has dropped to 20% from a peak of 23%, yet remains elevated compared to historical norms. Typically, high HV20 readings are bearish for equities, but a continued decline to 15% or below would likely neutralize this negative signal.
VIX and Volatility Derivatives: Conflicting Signals Persist
The VIX is presenting a complex picture. The “spike peak” buy signal from August 5 remains valid until September 6, adhering to a 22-day holding strategy. At the same time, the VIX is still trading above its 200-day moving average, reinforcing a sell signal trend that began in late July. If the VIX closes below its 200-day moving average of 14.40 for two consecutive sessions, this sell signal will be invalidated.
Volatility derivatives suggest a generally bullish outlook for stocks, with most term structures sloping upward and VIX futures trading at a premium. However, a notable exception is the October VIX futures, which have been inflated by election-related uncertainties, signaling increased market expectations of post-election volatility.
New Trade Opportunities: XRAY and WBA
Here are two potential trade setups:
- Dentsply Sirona (XRAY): A new buy signal has been generated by the weighted put-call ratio. However, this trade is contingent on the stock closing above resistance at $26. If that occurs, consider purchasing 4 XRAY (Oct. 18) 25 calls.
- Walgreens Boots Alliance (WBA): A longer-term buying opportunity is developing following the stock’s removal from the Dow Jones Industrial Average — a move that often precedes a rebound. Enter the trade if WBA closes above $10.60 by buying 2 WBA (Sept. 20) 10.5 calls.
Seasonal Trends and Strategy Adjustments
Traders should also prepare for some seasonal patterns. Historically, the week following September’s options expiration often sees market declines. This year, that period starts on September 20, presenting a potential short-selling opportunity. Another pattern to watch for comes at the end of October, followed by several year-end trends, including the “January Effect” and the “Santa Claus Rally.”
Active Positions and Recommended Adjustments
Here is a quick summary of existing trades and recommended actions:
- FIVE, AKAM, RHI: Maintain positions, adjusting stops as needed based on put-call ratio signals.
- SPY Spreads: Multiple positions are active in response to various market signals. Keep an eye on the short strikes and adjust by rolling up or down accordingly.
- Calls and Puts on AOS, CMG, and Others: Review positions as signals evolve and respond to significant market movements.
Final Thoughts: Navigating a Market at Crossroads
While the broader market indicators lean bullish, some contradictory signals—such as elevated HV20 and the ongoing VIX trend—require caution. Staying nimble and responsive to new data, while adjusting positions based on validated signals, will be key in this environment.
