MW Troubling S&P 500 chart suggests that stock investors have a rough road ahead
By Lawrence G. McMillan
Oversold rally earlier this week doesn't erase the U.S. market's negative picture
The stock market, as measured by the S&P 500 Index SPX, continued to sell off through the end of last week. By that point, some relatively deep oversold conditions were in place, and the market rallied this week in an attempt to work them off. Oversold rallies typically reach the declining 20-day moving average, but this one didn't get that far and retreated in Thursday's trading session.
The S&P 500 chart has a negative pattern now, after having broken down below previous support at 5,050. There is resistance at the all-time highs (5,260). There is also a new downtrend line taking shape, although it is not drawn on the chart below because it is almost exactly where the declining 20-day moving average is.
There is near-term support near 4,960 - the lows of last week - and major support at 4,800. The 4,800 level was the high of the bull market leading up to January 2022, when a nearly year-long bear market began. It also proved to be resistance this past December and January. So, in theory it is strong support now.
During last week's selling, the S&P 500 closed below the -4<SIGMA> "modified Bollinger Band" (mBB) for several days. Finally, with the oversold rally earlier this week, the S&P 500 managed to climb back above the -3<SIGMA> Band. That generates a "classic" mBB buy signal. It is marked on the chart as a green 'b.' We do not trade these "classic" signals because they have proven to be too subject to whipsaws. Rather we wait for further confirmation of the move (upward, in this case) to generate a full-blown McMillan Volatility Band $(MVB.AU)$ buy signal. That would occur if the S&P 500 traded at 5,093.
Equity-only put-call ratios remain solidly on sell signals for the U.S. stock market, as they continue to move higher at a rapid rate. They will remain on these sell signals until they roll over and begin to trend lower.
Breadth has improved over the past few days, and the NYSE breadth oscillator has generated a buy signal. It appeared that the "stocks only" breadth oscillator was about to join in as well, but with the heavy selling taking place on April 25, that is questionable now.
New highs and new lows on the NYSE have been taking turns at being the greater number. But neither has been able to exceed 100 on any given day, much less on two consecutive days, so this indicator remains in a neutral status.
The VIX VIX indicators are mixed, in a major way. There is a "spike peak" buy signal in place (the green "B" on the accompanying VIX chart) and a trend of VIX sell signal (the pink "S" on the chart). The trend signal is often more long-lasting, but both have reliable track records. It is rare for them to give opposing signals like this, but when it happens one or the other usually is stopped out fairly quickly. The buy signal would be stopped out if VIX were to close above its most recent peak, 21.36. The sell signal would be stopped out if VIX were to close below its 200-day moving average - currently at 14.90 and rising slowly.
The construct of volatility derivatives remains mostly bullish for stocks. That is, the term structures of the VIX futures and of the CBOE volatility indices slope upward, and most of the VIX futures are trading at a premium to VIX. However, some worrisome signs persist, particularly the fact that the front-month May VIX futures are now approaching the price of the June VIX futures. If May rises above June by at least one point, that would be a major sell signal.
In summary, the negative picture that was developing in the past couple of weeks is still in place, despite the strong oversold rally earlier this week. We are maintaining a "core" bearish position and will trade other confirmed signals around that.
New recommendation: Recapping
For the past few weeks, we have made some conditional recommendations that have not all been filled. The only remaining one at this time is a longer-term potential buy signal from Walgreens Boots Alliance $(WBA)$. We're keeping this recommendation open but will not continue to reprint the reasoning behind the trade.
If WBA closes above $22.50, then buy 4 WBA June (21st) 22.5 calls in line with the market.
New recommendation: Potential MVB buy signal
A "classic" modified Bollinger Band (mBB) buy signal has taken place. But we need further upside confirmation in order for a MVB buy signal to occur. Specifically, the Standard & Poor's 500 $(SPX.UK)$ must rise to 5,093 or higher. It is quite a bit below that level now, but there could theoretically still be a buy signal.
If SPX trades at 5,093 or higher, then buy 1 SPY May 31 at-the-money call and sell 1 SPY May 31 call with a striking price 16 points higher.
If this position is established, its target is for SPX to trade at the +4<SIGMA> Band; that would most likely entail a move to new all-time highs by SPX. The buy signal would be stopped out if SPX were to fall and close below the -4<SIGMA> Band.
New recommendation: Poet Technologies $(POET)$
POET (POET) is a low-priced stock that recently broke out strongly to the upside, accompanied by heavy stock and option volume.
Buy 10 POET June 21 2.0 calls at a price of 0.60 or less. Set a trailing closing stop at 1.38.
Follow-up actions:
All stops are mental closing stops unless otherwise noted.
We are using a "standard" rolling procedure for our SPDR S&P 500 ETF Trust SPY spreads: in any vertical bull- or bear spread, if the underlying hits the short strike, then roll the entire spread. That would be roll up in the case of a call bull spread or roll down in the case of a bear put spread. Stay in the same expiration and keep the distance between the strikes the same unless otherwise instructed.
Long 0 SPY May 3 520 calls: This position was our "core" bullish position. It was stopped out on April 19.
Long 3 TLT TLT May 17 90 puts: We will hold as long as the put-call ratio sell signal is in place for U.S. Treasury bonds.
Long 4 CSX May 17 37.50 puts: We will hold these puts as long as the weighted put-call ratio for CSX $(CSX)$ remains on a sell signal.
Long 0 DKNG $(DKNG)$ May 17 46 calls: The calls were stopped out on April 17.
Long 4 RSI $(RSI)$ May 17 5 calls: We will hold without a stop initially, in order to let takeover rumors play out.
Long 2 MCD $(MCD)$ May 17 275 puts: We will hold this position as long as the weighted put-call ratio remains on a sell signal.
Long 1 SPY May 3 502 put: We will hold these puts as long as the breadth oscillators remain on sell signals. As noted above, the "stocks only" breadth oscillator's signal is bearish, while the NYSE signal has turned bullish. So we are continuing to hold these puts. Roll down again if the put becomes eight points in-the-money.
Long 2 SPY May 31 516 and Short 2 SPY May 31 486 puts: Hold this position as long as the equity-only put-call ratios remain on sell signals. This is our "core" bearish position for now.
Long 3 AEYE May 17 12.5 calls: Stop out if AEYE $(AEYE)$ closes below $10.90.
Long 1 SPY May 24 502 put and Short 1 SPY May 24 482: Bought in line with the trend of VIX sell signal. Stop out of this spread if VIX closes below its 200-day moving average $(MA)$ for two consecutive days. The 200-day MA is at 14.95 and rising slowly.
Long 1 SPY May 24 500 call and Short 1 SPY May 24 515 call: Bought in line with the VIX "spike peak" buy signal of April 22. It would be stopped out if VIX closes above 21.36. Otherwise, the position will be closed out after 22 trading days.
All stops are mental closing stops unless otherwise noted.
Send questions to: lmcmillan@optionstrategist.com.
Lawrence G. McMillan is president of McMillan Analysis, a registered investment and commodity trading advisor. McMillan may hold positions in securities recommended in this report, both personally and in client accounts. He is an experienced trader and money manager and is the author of the best-selling book, Options As A Strategic Investment. www.optionstrategist.com
(c)McMillan Analysis Corporation is registered with the SEC as an investment advisor and with the CFTC as a commodity trading advisor. The information in this newsletter has been carefully compiled from sources believed to be reliable, but accuracy and completeness are not guaranteed. The officers or directors of McMillan Analysis Corporation, or accounts managed by such persons may have positions in the securities recommended in the advisory.
-Lawrence G. McMillan
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April 25, 2024 17:20 ET (21:20 GMT)
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