Unlike the long accumulation channel from the March 2020 low the current operative technical pattern for S&P 500 Index looks like a downward sloping channel – call it a distribution channel. The Market Review provides details including a chart along with futures and options indictors followed by another marked-to-market update for the open Energy Select Sector SPDR Fund (XLE) long call spread idea.

S&P 500 Index (SPX) 4391.34 advanced 34.30 points or +.79% last week after a thumping 1.30% decline last Monday before recovering at the end of the week after the employment report.

Here's the chart after applying the 4-point reversal rules used for continuation patterns. Connecting points 1 & 3 and 2 & 4 creates a very useful downward sloping channel. First, it suggests lower prices while providing a guideline in the less likely event it closes back about the upper channel line. If so, closes back above resistance from the red 50-day Moving Average at 4438.04 hovering above like a cloud on a rainy day would confirm the end of the current pullback. However, a further decline toward the center of the channel seems more likely.

After peaking at 4545.85 on September 2, the decline down to reversal point 3 totaled 266.91 points or -5.87%, from the intraday high to the intraday low.

Friday's trading in a narrow range all morning appeared unusual after the much-anticipated employment report as traders decided how the report may influence the upcoming FOMC meeting in early November.

Invesco QQQ Trust (QQQ) 361.16 added .98 of a point or +.27% and still well below the 50-Day Moving Average at 369.54. A quick rise of 13 basis points in the yield of the 10-year Treasury Note from 1.48% on October 1,to 1.61% on Friday seems to explain the underperformance relative to the S&P 500 Index while confirming the consensus view that the Fed intends to announce a taper program in early November.

CBOE Volatility Index (VIX) declined 2.38 points or -11.25% last week ending at 18.77. Our similar IVolatility Implied Volatility Index Mean, IVXM using four at-the-money options for each expiration period along with our proprietary technique that includes the delta and vega of each option, slid 1.86 points or -10.71% to close at 15.51% compared to 17.37% for the week ending October 1.

The spikes are inversely consistent with reversal points in the developing downward sloping channel shown above. Last Friday CBOE total put volume at 3.06 million contracts exceeded total call volume of  2.96 million. Total call volume usually always exceeds total put volume.

VIX Futures Premium

VIX futures premium on Friday ended at 11.47% in the lower end of the green bull zone up from October 1 at 4.68% in the yellow caution zone. Front month October futures stop trading in 7 days.

Since most of the volume and open interest are in the two closest futures contracts measuring the volume-weighted premium relative to the standard 30-day VIX provides a good real-time sentiment indicator based upon actual commitments of large Asset Managers and Leveraged Funds. The chart reflects the distance from the VIX to the futures curve computed from the two front-month contracts. 

Market Breadth as measured by our preferred gauge, the NYSE ratio adjusted Summation Index that considers the number of issues traded, and reported by McClellan Financial Publications declined 3 of the 5 days last week turning slightly higher on Thursday and Friday, gaining 10.63 points or 11.47%  to end at -82.08.

While still below the low made last September 30 at -8.12 before turning higher on October 1, 2020, the current upturn, should it continue , would encourage "buy-the dipper" traders and the bulls.

WTI Crude Oil (CL) 79.35 basis November futures ended the week up another 3.47 points or +4.57% higher.

Energy Select Sector SPDR Fund (XLE) 56.57 up 2.73 points or + 5.07% last week.

Original suggestion in Digest Issue 39 "Buy-the-Dippers Return [Charts]." 
Suggestion adjusted in Digest Issue 40 "Goodbye September [Charts]."

Long Nov 19 54 call for 1.90
Short Nov 19 57 call for .82
Initial debit 1.08.

Marked-to-market at 1.45 on the close Friday results in a .37 gain or 34% in two weeks. While it doesn't seem like much, the spread between strike prices was three points and the risk was limited to the initial debit.

Now as the price approaches the short leg of the spread with 39 days to expiration consider rolling it up and out to December 17 as it closes above 57.

Next, consider adding a risk reversal, also called a synthetic long:

Using the ask price for the buy and mid for the sell the debit on Friday was 1.42 with a slight implied volatility edge and delta of .4771 (.3569 +.1202). Ideally, the 49 put will expire worthless on November 19 and then a December 19 49 put can be sold to further reduce the debit. Just in case it all goes wrong, use closes back below 54 as the SU (stop/unwind).

Strategy

In bull markets, a good strategy is to stay long equities and/or ETFs and then tactically hedge pullbacks as they begin developing since ordinary pullbacks can become corrections when something unexpected happens. Then corrections can become downturns when something else unexpected happens, and downturns can become bear markets when many unexpected things change medium and long-term fundamentals.

The equity market's early reaction to Friday's employment report seemed baffling, but as analyst's explained it was actually better than the disappointing headline number and not enough to alter expectations for the release of a taper plan at the upcoming November 2-3 FOMC meeting as they yield on the 10-Year Treasury Note confirmed, rising 13 basis points last week to end at 1.61%.

This week it's about the downward sloping channel for equities, along with crude oil prices and interest rates since they have a tendency to rise together.

Summary
The slight advance made last week by the S&P 500 Index seems consistent with the formation of a useful downward sloping channel that can be used to help determine when the current pullback may conclude. Crude oil continued higher along with interest rates on the 10-year Treasury Note that ended the week at 1.61%.