The price action in the S&P 500 Index options (CBOE: SPX) for the past several months has been devastating for bears. Going back to November of 2010, options trading investors have seen every key resistance level being taken out by the bulls and prices pushed higher and higher still.
Nearly 83% of all stocks are currently trading above their 200 period moving average and over 68% of equities are above the 20 and 50 period moving averages. While this certainly does not mean that prices are going to rollover, it is hard to refute the conclusion that prices in the equity market are overbought.
A quick glance at the SPX daily chart reveals the recent price action.
SPX Chart
The SPX daily chart shows that prices are extended to the upside in this bull market run. However, the distance between current price action and the 200 period moving average is significant. There is a total of 167.79 SPX points between Friday’s close at 1329.15 and the 200 period moving average at 1161.36. Based on Friday’s closing price a reversion to the mean (200 period moving average) would produce a decline of around 12.62%.
I am still convinced that stocks need to pullback at some point if they are to continue higher. Consolidation or a 5-10% correction would likely be healthy for the market and might prove to be a launch pad for another thrust higher in price. From the underlying strength in the domestic market, a correction or pullback will likely be an opportunity to get long barring price breaking down through the lower level of the rising channel located on the weekly chart.
I am not sure that I am going to get involved in the short side if we see bearish price action in coming weeks, instead I will likely be looking for opportunities to get long equities at more attractive prices. Right now risk to the downside appears to be increasing as the S&P 500 continues to probe higher.
Light Sweet Crude Oil
Oil prices surged when Egyptian protests intensified and have sold off recently as President Mubarak has stepped down and demonstrations have turned into nationwide celebrations. In addition, the U.S. Dollar has strengthened considerably the past few days which has also put price pressure on oil. The daily chart of light sweet crude oil futures is illustrated below:
Oil Futures
Oil price are hanging onto a key support level by a thread and price action in the coming week could see prices push lower through the support area and an eventual test of the 200 period moving average. I am not considering a short in oil, but I am looking at lower prices as a solid risk / reward long entry. I am going to be patient, but envision building a longer term trade using options to profit from a possible rally after putting in a clear bottom.
Conclusion
While it may be bear season in the equity markets, the oil futures market has produced a new home and a new river for eager bears to feed. The question continues to remain how long will the market punish the short traders in equities while rewarding them in the oil futures pits.
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