There are a lot of things recently that have been making my eyes bulge nearly out of their sockets. The main items causing me to do double takes are: the ferocious rally in the U.S. bond market, the collapsing U.S. dollar, the declining levels on the CBOE Market Volatility Index (VIX), and the overall strength of this market. It seems like every dip is met with buyers and every economic report, whether positive or negative, prompts futures buying. Likewise it seems that earnings have been coming in better than expected, and generally traders have been brushing aside mediocre earnings news and voraciously bidding up stocks on any type of positive news. All of that is in short, bullish.
That being said, I recently wrote a market observation entitled Sentiment Warning Signs, which highlighted some potential cautionary items that are showing up on the sentiment front. Since posting that observation, the S&P 500 Index has rallied 2.7 percent, which is a pretty solid one-week performance. The point that I'm trying to make is that sentiment analysis is an art, not a science. It's much better as an analyst or trader to focus on a range for an individual indicator as opposed to specific level. Likewise, it's a bit of an understatement given the inherent time decay of option premium buying to say that "timing is everything." So while the market is continuing to push higher, I'm personally trying to avoid aggressively shorting the market, if anything I'm trying to take advantage of the market's current upside momentum.
From a technical perspective, while I've been focusing on 950 as the top of the current trading range for some time, one thing I failed to mention is why this level is so significant to traders. If you take a look at the following weekly chart you will see that 950 on the SPX marks the low from the week of September 21, 2001. The significance of the date is probably not lost on anyone, but that was the week where the U.S. stock market resumed trading after the terrorist attacks of September 11th. As we have frequently discussed on this website, markets have memories, and prior support often becomes future resistance. Given the psychological significance of this level from both a support and resistance standpoint, I felt it was an important aspect to point out to readers of this website.
"The point at which a competitor is pursuing the best possible strategy, given the strategies of the other participants" - John F. Nash
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