Wow, what a week! The S&P500 gained about 70 points, or 3% in only 4 days of trading. We closed the year on 12/29 with a drop below the pink channel this blog has been following (red arrow) and BAM! as Emeril would say…we sail to the top of the pink channel (downward facing green arrow) in nothing flat and actually closed above it on Friday with a big push into the close. Obviously price has pushed through the 2016-2017 white channel top as well and closed above it the last 3 trading days (upward green arrow). If the market doesn’t pause for a breath soon (perhaps retest the top of the white channel and bottom of the pink channel again late this week?) things could get very interesting to the upside.
Normally the options market anticipates the volatility in the market very well and prices options accordingly. Yes, the first week’s pricing indicated an increase in volatility when compared to December, but this past week was a giant whiff as the “expected move” of no more than 30 points was dwarfed by the 70 point move. If you have taken any statistics class, you have learned that a 1 standard deviation move away from the middle of the distribution curve occurs about 68% of the time, and a 2 standard deviation move encompasses 95% of all results. The 70 point move last week was roughly a 1 in 33 to 1 in 50 move, so something seen once or twice a year. Even more rare is that explosive moves surpassing 2 standard deviations typically happen to the downside as a reaction to an adverse event, not an explosion upward. Such is the current market climate…UP is the only direction and the sooner you recognize that and just hang on for the ride, the better off your portfolio is going to look. A day of reckoning is coming…but absolutely nobody has crystal ball to see when the train wreck is coming…next week? next month? next year?
For the upcoming week, I’m watching the opening on Monday to see if there is continued strength to this rally. If we are into clear sailing above the pink and white channels, resistance is non-existant and price may continue to explode upward. However, my technical analysis background says that a backtest of the white and pink channels later in the week near SPY $270 makes sense before resuming higher. Obviously, a close below the $270 level, or more critically the $266 level would likely be short term catastrophic for the market. Good luck out there!