SPX: Bottoming Right Where It Should Have

 | Oct 16, 2012 | 4:30 PM EDT  | Comments
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In recent weeks, I have talked about some downside targets and said if they were met, I  add to my positions – first, in the S&P 500 (SPX). Actually going back to the late September lows (bottomed Sept. 26, on Yom Kippur), I was still holding out for a pullback that filled that Sept. 11 gap at 1429 in the SPX and, preferably, a bit lower to the prior double-top highs in the SPX .

Of course, the Sept. 26 pullback bottomed at 1430.53, so that gap was never filled. And the obligatory return to prior highs also never quite occurred. That is, until last Friday. Recall, the Aug. 21 high in the SPX was 1426.68. After backing off from that level, the SPX popped to new highs achieved on Sept. 14 at the 1474.51 level. Such a move almost necessitates a return to prior highs, which were from Aug. 21 at 1426.68.

Here is what I said on Sept. 27 after the market bottomed at 1430.53:

"Actually, during Wednesday's continued slide, the S&P 500 seemed to be headed for its Sept. 11 gap at the 1429 level. But it stopped about 1.5 points shy of that gap and turned up. I also figured that maybe it had to do a complete retest of the previous highs at 1422.38 (April 2) and 1426.68 (the Aug. 21 top), which have now morphed into support. But I guess that will have to wait for the next pullback."

Fast forward to Friday, when the SPX sold off to 1425.53, a little over a point below the prior August multi-year high. In the process of that selloff, the Sept. 11 gap at 1429 was also filled. End of story.

 

S&P 500 (SPX) -- Bottoming at the prior (Aug. 21) highs
Source: optionsXpress

 

Then there was the Russell 2000, and on that one, I've been talking about a pullback to the Sept. 6 gap, saying I would add to my positions if the Russell 2000 filled that gap. It's a big gap, very visible on the charts from 821 to 825. On Friday, the RUT didn't quite fill that gap but yesterday when everything else was moving higher, the RUT hung around long enough to fill that gap in its entirety, bottoming a fraction of a point below it at 820.42. And it lifted off from there.

Of course, the action in the Russell 2000 (RUT) has been anything but stellar -- not only during the pullback, but since then as well. Note that while the SPX has popped 10 points above last Thursday's highs, the Russell 2000 still hasn't even returned to last Thursday's highs. That is not a good sign. But in any case, as I said I would if that gap got filled, I added to my Russell 2000 positions at Friday's close with the RUT at 823.09, the low close so far. That returned my accounts to a maximum of 50% invested at Rydex and I remain short a bunch of iShares Russell 2000 (IWM) puts.

 

Russell 200 (RUT) -- Finally filled its Sept. 6 gap
Source: optionsXpress

 

Also encouraging for the near term was another oversold reading in the McClellan Oscillator, which settled at the -119 level on Friday. Though yesterday it was back to -59 on the oversold side of neutral that is still not great. And it should be back on the overbought side of neutral at today's close.

Then there is the Market Volatility Index (VIX), which I figured would make some efforts to fill that gap from Oct. 8 at 14.33. It has almost filled as of today's low at 14.50. Now there is another gap from this morning's opening, which also will get filled. That tells me the market is going to back off a bit in the not too distant future.

 

Market Volatility Index (VIX) -- Almost filling its Oct. 8 gap
Source: optionsXpress

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