Stocks Are Currently Riding an Oversold Rally. Here’s Where It Could End

The S&P 500 is attempting to recover after hitting extremely oversold conditions. The most recent low hovered around 5,500, though multiple daily lows fell within the 5,500 to 5,540 range, making this entire zone a significant support level. Typically, when the index experiences an oversold rebound, it tends to climb toward its declining 20-day moving average, which currently stands at 5,780 and is dropping quickly.

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Additionally, resistance is expected around the 5,770 mark, an area that previously acted as support.

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A potential McMillan Volatility Band (MVB) buy signal is emerging, indicated by the green “B?” on the SPX chart. In recent sessions, the S&P 500 closed below the -4σ modified Bollinger band (mBB) multiple times. On March 17, the index managed to settle above the -3σ band, which technically triggered a “classic” mBB buy signal.

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However, such signals have a tendency to be unreliable due to frequent whipsaws, so they are not traded directly. Instead, traders look for further confirmation before acting on an MVB buy signal. For this to happen, SPX needs to trade above 5,730 to validate the setup.

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Meanwhile, equity-only put-call ratios continue their upward trajectory, as the market has witnessed persistent put-buying activity. Both ratios are now reaching their highest levels, signaling an oversold condition for stocks. The weighted put-call ratio has exceeded last year’s peak and is now at levels not seen since the 10% market correction in late 2023. However, these indicators will not generate buy signals unless they peak and start declining.

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Market breadth has shown signs of improvement, leading both breadth oscillators to issue buy signals. These signals have been validated through a two-day confirmation period. Additionally, for two consecutive days, the number of new highs on the New York Stock Exchange (NYSE) has exceeded new lows, effectively nullifying the prior sell signal from this indicator on March 18.

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As a result, this metric has shifted back to a neutral stance, meaning it is neither issuing a buy signal nor a sell signal at the moment. The next movement in this indicator will be determined by whether NYSE new highs or new lows exceed 100 for two consecutive days.

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The Cboe Volatility Index (VIX) is presenting a mixed picture. On the bullish side, the most recent “spike peak” buy signal from March 12 remains intact and will be maintained for 22 trading days, unless VIX rises above its recent peak of 29.57, which would invalidate the signal.

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On the bearish side, the ongoing VIX trend sell signal is still in effect, as both VIX and its 20-day moving average are sitting above the 200-day moving average.

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This sell signal would be invalidated if VIX were to close below its 200-day moving average, which is currently positioned slightly above 17.

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Looking at volatility derivatives, the term structure has not yet shifted to a bullish stance. Ideally, if market conditions were optimistic, the VIX futures curve would exhibit an upward-sloping pattern. However, at present, the curve appears flat. Following the March VIX futures expiration, the April contracts have now become the front month, and traders are monitoring the price differential between April and May futures to gauge any potential market shifts.

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At this point, April futures are trading approximately 15 cents higher than May futures, which suggests a slightly bearish sentiment. If this inversion deepens, it could become an outright bearish signal for equities. Conversely, the broader VIX term structure is more positively sloped, which provides a modestly bullish signal for stocks.

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In summary, the market is undergoing an oversold rally, and this advance is likely to encounter resistance once the S&P 500 surpasses its 20-day moving average. The approach remains to trade confirmed signals as they develop. If a sufficient number of technical buy signals materialize, this could evolve into something beyond a typical oversold bounce. For now, traders are advised to continue rolling options that are deeply in-the-money.

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Potential MVB Buy Signal

As previously mentioned, a “classic” mBB buy signal has already occurred. While this type of signal is not directly traded, it does set the stage for a potential MVB buy signal, which is a more reliable indicator.

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If SPX trades above 5,730, then the following trade setup is recommended:

• Buy 1 SPY (April 17) call option
• Sell 1 SPY (April 17) call option with a strike price 20 points higher

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If executed, this position would be considered a longer-term trade. The upside target is the +4σ band, while a stop-loss would be triggered if SPX closes below the -4σ band.

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New Trade Recommendation: BXP

A new weighted put-call ratio signal has emerged for BXP Inc. (BXP). However, confirmation from price action is needed before initiating any positions.

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If BXP closes above $70, traders are advised to enter the following trade:

• Buy 3 BXP (May 16) 70 calls at market price.

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This position should be maintained as long as the weighted put-call ratio remains on a buy signal.

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