A harsh dose of reality set in after Nvidia Corp.’s (NVDA) earnings release last week, and the S&P 500 Index (^SPX) experienced one of the sharpest drops in recent months, losing nearly 240 points from its highs to finish near the lows of the day. So, let's review what we have, writes Lawrence McMillan, editor of Option Strategist.
Things heated up with implied volatility, the CBOE Volatility Index (VIX). That produced some oversold conditions, but “oversold does not mean buy,” as we've said hundreds of times before.
SPX reached major support at the 6,500-6,550 level. If it holds, then there is no problem, and SPX will remain in its trading range, where the high is 6,900 (the all-time highs). But if 6,500 is breached, then you might be looking at a trip down to the 200-day moving average, which is currently at 6,200 or so.
Equity-only put-call ratios exploded to the upside, reaffirming their sell signals that were first generated back in mid-October. Both breadth oscillators have been on sell signals, and they are mired deeply in oversold territory. But stocks can continue to decline while these oscillators are oversold.
To summarize: things have taken on a more bearish slant, but as long as SPX holds at support near 6,500, it's not going to matter too much.
