Stocks are stuck in the breakdown lane and repairs will take time

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Investors can expect the U.S. market to post lower highs and lower lows.

The stock market, as measured by the S&P 500 Index SPX, has broken out of its trading range to the downside. The close below 4330 was the catalyst, as we have been saying it would be.

Finally, the 200-day Moving Average of SPX is now approaching that same 4200 level, so that might add further support. The number of New 52-week Lows on the NYSE is dominating New Highs. There have been a few days with over 200 issues making new lows, and one day with 300 issues doing so. This indicator gave a well-timed sell signal a little over a week ago, and that sell signal remains in place now. It would be stopped out if New Highs on the NYSE were to outnumber New Lows for two consecutive days.

The construct of volatility derivatives has gotten far less bullish, but it has not generated a sell signal yet. The term structure of the VIX futures has flattened a lot, but the front-month October VIX futures have not risen in price above the November VIX futures. If they do, that would be a very bearish sign. The CBOE Volatility Index term structure also slopes upward, with the exception of the 9-day Index , which is elevated because of the upcoming Unemployment Report.

We are using a “standard” rolling procedure for our SPY spreads: in any vertical bull or bear spread, if the underlying hits the short strike, then roll the entire spread. That would be roll up in the case of a call bull spread, or roll down in the case of a bear put spread. Stay in the same expiration and keep the distance between the strikes the same unless otherwise instructed.

 

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