It's important to monitor the difference between VIX VIX and the 20-day realized volatility (HV20) of the S&P 500 $(SPX.UK)$ SPX. There have only been a few times in U.S. stock-market history when VIX minus HV20 has fallen below -10, and this most recent move was one of them. It reached -26 at its nadir a little over a week ago.

But now, the situation has reversed and HV20 has fallen to be almost equal to the VIX. This is an intermediate-term buy signal for the U.S. stock market. Specifically, the differential dropped far enough by May 9 in order to generate the buy signal. So, we are going to act on that with a long-term position in SPDR S&P 500 ETF Trust $(SPY.NZ)$ SPY options.

Buy 1 SPY (Sept. 19) 585 call and Sell 1 SPY (Sept. 19) 635 call in line with the market.

We would stop out of this spread if the differential (VIX minus HV20) should fall back below -10. Otherwise, roll up on both sides if SPY reaches 635.

The graph below shows where the maximum differential and the buy signal took place.

More broadly, the S&P 500 Index has now broken out over resistance at 5,800, and this is a notably positive sign. The index also overcame a resistance level at 5,700 and blew right through its 200-day moving average in doing so.

The next upside target and resistance is the all-time highs, near 6,150. Yes, it is possible that the market could turn down without attaining new highs, but that seems unlikely now. There are several support areas on the chart, all of which are marked with red horizontal lines on the SPX chart below.

There are also two gaps (circled on the chart) that remain open. If the higher one were filled on a pullback to 5,700, that would not deter the bullish case. But if the lower one were to be filled, that would already be a severely bearish move. It seems unlikely that the lower one will be filled anytime soon.

Another interesting development has taken place. Realized volatility has plunged this week. As a result, the "modified Bollinger bands" (mBB) have contracted sharply toward the 20-day moving average. SPX is now trading above the +4<SIGMA> band.

First, that completes the previous McMillan Volatility Band $(MVB.AU)$ buy signal. Second, it potentially sets up an MVB sell signal, but there is no guarantee of that. The initial step in that process would be for SPX to close below the +3<SIGMA> band. That would occur on a close below 5,796. But even that would not be enough for an MVB sell signal. There would have to be further downside movement to achieve that. So, for now, there is no MVB signal, and we are watching the situation as it develops.

Equity-only put-call ratios continue to fall sharply. That means that these ratios remain bullish in their outlook for the stock market. There would only be a change in that status if the ratios were to roll over and begin to rise.

Market breadth has continued to be strong, for the most part. As a result, the breadth oscillators remain on buy signals, and they are overbought. It is a favorable sign for these oscillators to be overbought when SPX is beginning a new leg upward, as it is now. It would take at least two days of negative breadth to reverse these oscillators to sell signals.

New highs have mostly been outpacing new lows on the NYSE, but not by enough to generate a buy signal from this indicator. It would take 100 new highs for two consecutive days in order to do that (or 100 new lows for two consecutive days in order to generate a sell signal). Lacking that, this indicator remains in a neutral state.

Realized volatility has plunged over the past week. The 20-day historical volatility of SPX (HV20) has fallen to 22%. This is enough to generate the buy signal that we have recently written about. It is an intermediate-term buy signal and should carry a good deal of importance going forward.

Implied volatility (VIX) has continued to fall as well. The previous "spike peak" buy signal of April 7 has expired, and positions associated with it have been closed. In addition, VIX has closed below its 200-day moving average for two consecutive days, so that terminates the VIX sell-signal trend, which was first issued back in mid-February. As a result, there are no signals associated with the VIX chart at this time. For there to be a VIX buy-signal trend, the 20-day moving average of VIX would have to cross below the 200-day moving average. But since they are still more than 5 points apart, that is not going to happen quickly.

The construct of volatility derivatives has improved sharply this week, and it is finally back to a bullish outlook for stocks. That is, the term structures are sloping upwards, and the VIX futures are trading at a premium to VIX. The VIX futures term structure's slope is not steep, but it is upward.

In summary, we are not carrying a "core" position at this time. If SPX breaks out to a new high, then we will add a "core" bullish position. Meanwhile, we will continue to trade confirmed signals and to follow their exit points as well. Finally, be sure to roll deeply in-the-money options to lock in credits and reduce risk of reversals in price.