Without any help from the weather, after several anxious weeks, without fanfare the S&P 500 Index finally broke out above the seemingly impenetrable barrier at 1850.84, putting an end to concerns about a potential Head & Shoulder Top pattern we have been carefully following. This should mean all is clear for the uptrend to resume. However, index divergences are suggesting the need for further investigation. While adding our other indicators to the mix helps a little to make the bull case, we remain somewhat cautious.

We begin with our market review.

S&P 500 Index?(SPX) Last week we acknowledged the diminishing probability the missing right shoulder would form keeping in mind it continued to be a possibility until it exceeded the head at 1850.84 on a closing basis, which occurred last Thursday on rather low unimpressive volume. It continued higher Friday with more convincing volume, which helped confirm the breakout.

However, when we look at the?SPDR Dow Jones Industrial Average?(DIA) we still see a potential Head & Shoulders Top that would requiring a close back above the December 31, 2013 high of 165.51 to resolve the divergence. Perhaps the Dow Jones Industrial Average is no longer the best market measure since non-industrials like?Coca-Cola?(KO),?UnitedHealth Group?(UNH), and others have replaced many of the industrial issues over the years. In addition, the Dow Jones Transportation Average, detailed below adds to the divergence concerns.

On the positive side,?Power Shares?QQQ?(QQQ) broke out above the previous January 22, 2014 high of 89.00 on February 13, 2014 and then made eleven consecutive closes above 89.00. Maybe we should be paying more attention to this index and not be overly concerned about the lagging Dow Jones Industrials and Transports.

CBOE Volatility Index??(VIX) The VIX now seems to favor the 14 level like this is the new normal compared to last year when it often declined to 12.

The table below shows the VIX cash compared to the next two futures contracts as well as our calculation of Larry McMillan’s day-weighted average between the first and second months.

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The day weighting applies 55% to March and 45% to April for an average premium of 10.38% shown above. Our alternative volume-weighted average between March and April, regularly found in the Options Data Analysis section on our homepage, is slightly lower at 10.12%. We said a few weeks ago that?the premium should be back into a 10% – 20% range when the S&P 500 Index closes above 1850.84.

VIX Options

With a current 30-day?Historical Volatility?of 133.44 and 82.54 using?Parkinson’s range method, the table below shows the Implied Volatility (IV) of the at-the-money VIX calls and puts using the futures prices based upon Friday’s closing option mid prices along with their respective month’s futures prices, since the options are priced from the tradable futures.

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The average implied volatility of the four at-the-money VIX options at 76.22 compared to the range historical volatility of 82.54 suggests they are relatively inexpensive and not reflecting much concern about an immediate SPX decline.

CBOE S&P 500 Skew Index?(SKEW) SKEW measures the purchase of out-of-the-money S&P 500 Index puts that require a very large downside move to profit from long put positions. An increase of this index indicates greater expectations for an extreme down move.

Now 6.22 above the midpoint of the current relevant range between the November 6 low of 118.69 and the December 20 high of 143.19, it reflects increased hedging activity with out-of-the-money puts as the S&P 500 Index moves into new high territory.

US Dollar Index?(DX) ?For the last week or so, it seemed to find support around 80 but then made an unexpected decline Friday closing right on the December 27, 2013 low at 79.69. It’s unclear if comments made by Federal Reserve Chair Janet Yellen, that the central bank may change its strategy for reducing asset purchases should the economy weaken, was the reason for Euro strength and dollar weakness.

10-Year Treasury Notes?(TNX) yield 2.65% after reaching 3.03 on December 31. After reaching an intra-day high of 2.78 on February 21, interest rates declined all last week as seasonal factors and the weather continue to be cited as reasons for slowing economic conditions, which is consistent with the weaker dollar.

iShares Dow Jones Transportation Average Index?(IYT) ?The transports are in a narrow range around 130 and unable to make much progress after the gap lower on January 24. It would take a close back above the January 23 high at 135.93 to confirm the S&P 500 Index breakout. In the meanwhile, this creates a negative Dow Theory divergence to consider along with the lagging Dow Jones Industrial index. Both seem to be reflecting expectations for a slowing economy and confirmed by decelerating rail traffic.

NYSE McClellan Summation Index? The summation index is an intermediate indicator comprised of a running total of the McClellan oscillator, a leading indicator, which is the difference between a 19 period and a 39 period exponential moving average of the net difference between the advancing and declining issues on the New Your Stock Exchange. The summation index is neutral at the +1000 level and it generally moves between 0 and 2000. However, it has been continually below the peak of 1218.52 made May 21, 2013 as the market continued higher creating a divergence. Since our last review, it advanced 398.33 points as the NYSE Composite confirmed the new S&P 500 Index high.