Bears Have Momo, But Need Extra To Break 2600 On S&P 500 In Next Several Sessions

The S&P 500 hurriedly jumped 6.4 percent in seven sessions. Impatient bulls essentially handed out shorts an opportunity to once again show up at 2800.

The risk is the downside, but it is likely 2800-2600 remains intact in the next several sessions.

Tuesday’s trading in which the 3.2-percent drop in the S&P 500 large cap index essentially came out of nowhere probably suggests that (1) short-covering helped in last week’s rally, and (2) bears have matters under control. The dynamics can change anytime but for that bulls need to step up, provided they have the wherewithal.

Last week, they gave it a try. Having defended in the prior week the lows of October, come Wednesday they latched onto the supposed dovish switch by Jerome Powell, Fed chair. The S&P 500 jumped 4.9 percent for the week. This probably caused shorts to cover (more here).

Then came last weekend’s trade truce reached between the US and China at the G-20 meeting in Argentina. Monday, the S&P 500 rallied 1.1 percent – in fact, it was up as much as 1.5 percent intraday. Once again, shorts likely caved in, at least initially. But they possess the ball. They have had it since at least early October.

Monday, the S&P 500 rallied alright, but the session produced a long-legged doji just above the 50- and 200-day moving averages. This was preceded by a 6.4-percent jump intraday in seven sessions. Bears showed up right where they were expected to. Since the S&P 500 sold off in January-February this year, 2800 has proven significant, including mid-October and early last month. On both those occasions, selling accelerated at that level (Chart 1).

There is a slight change in the character of bull-bear dynamics. Buy-the-dip mentality, which was otherwise pervasive, has ceased to work this year. Pretty much. Things have been volatile enough for nimble traders to potentially do well, but not passive longs.

Amidst this back-and-forth, particularly since early October, volatility has sustained at a higher level. In the past nine weeks, the ratio of VIX, which measures market’s expectation of 30-day forward volatility using S&P 500 options, to VXV, which does the same but goes out to three months, has persistently remained north of .9.  It closed Tuesday at one.

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Disclaimer: This article is not intended to be, nor shall it be construed as, investment advice. Neither the information nor any opinion expressed here constitutes an offer to buy or sell any ...

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