Stock market looks strong enough to stay in this higher orbit

MW Stock market looks strong enough to stay in this higher orbit

By Lawrence G. McMillan

Momentum has taken over the moment

The stock market, as measured by the S&P 500 Index SPX, has blasted through to new all-time highs. This was accompanied by buy signals from nearly every indicator that we follow, including those that measure the "internals" of the stock market.

The S&P 500 staying above 5,260 will confirm the breakout and should create a support area at 5,200-5,260. Below that, there are other support areas, but if this breakout should fail, then a close below 5,070 would be highly negative. That doesn't seem likely in the short term.

The most recent McMillan Volatility Band $(MVB.AU)$ buy signal was successful and has reached its target, since the S&P 500 closed above the +4<SIGMA> "modified Bollinger Band" (mBB). This now begins a new process that may result in an MVB sell signal, although it takes a while for the process to play out. First, the S&P 500 must close below the +3<SIGMA> Band, which would create a "classic" sell signal (we don't trade those). Then the index would have to decline further in order to confirm an MVB sell signal.

Equity-only put-call ratios are finally on confirmed buy signals for stocks as well. The standard ratio had moved to a buy signal a little over a week ago, but the weighted ratio did not achieve "official" bullish status from our computer analysis programs until just a couple of days ago. These ratios will remain bullish on the stock market as long as they continue to decline.

Market breadth has been extremely strong. Both breadth oscillators are on buy signals and are in deeply overbought territory. It is fine for these oscillators to be overbought when the S&P 500 is beginning a new leg upward. They could probably withstand two and maybe even three days of negative breadth and still maintain their buy signals.

Cumulative volume breadth $(CVB.AU)$ continues to make new all-time highs, thus confirming the new highs by the S&P 500. This indicator gave a buy signal a couple of weeks ago, with the target being new highs for the index. That has been fulfilled, so positions bought in line with that particular buy signal should be closed.

The number of new highs on the NYSE has continued to dominate the number of new lows. In fact, new highs have been greater than 100 for nine days in a row. That's quite a long streak. In any case, this indicator remains bullish on stocks. The buy signal would be stopped out if new lows on the NYSE exceeded new highs for two consecutive days.

VIX VIX has continued to decline as this rally has unfolded. A "spike peak" buy signal (for stocks) was registered on April 22 and is still in effect. By the rules of the trading system that we designed around spike peaks on the VIX chart, this signal will remain in place for 22 trading days - or for another week or so. In addition, a new trend of VIX buy signal (for stocks) has been registered as of yesterday's close. That's because the 20-day moving average of VIX crossed below the 200-day MA. It is marked with a circle on the accompanying VIX chart. I'm not really too thrilled about entering a trending signal on VIX when VIX is already so low, but the signal is in effect.

The construct of volatility derivatives remains bullish for stocks, too. The term structures of the CBOE Volatility Indices and of the VIX futures continue to slope upwards. Moreover, the VIX futures are all trading at healthy premiums to VIX.

In summary, we are rolling profitable bullish positions upward (or, in some cases, closing them out - CVB and MVB). The outlook is bullish now, but we will trade all confirmed signals.

New recommendation: Cognizant Technology Solutions $(CTSH)$

A new weighted put-call ratio buy signal has emerged here, so we will act on it.

Buy 3 CTSH (CTSH) (July 19) 70 calls in line with the market.

New recommendation: CSX Inc. $(CSX)$

We have recently concluded a successful sell signal (and put purchase) in CSX $(CSX.AU)$. This signal appears equally attractive to the previous sell signal.

Conditional call buy in CSX Inc.: If CSX closes above $34.60, then buy 5 CSX (Aug 16) 35 calls in line with the market

New Recommendation: Walgreens Boots Alliance $(WBA)$

This is a longer-term potential buy signal from Walgreens Boots Alliance $(WBA.AU)$. We are 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 21) 22.5 calls in line with the market.

Follow-up action:

All stops are mental closing stops unless otherwise noted.

We are using a "standard" rolling procedure for our 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 3 expiring TLT (May 17) 90 puts: The put-call ratio here has rolled over to a buy signal. Sell the TLT TLT puts if you can. They will expire worthless otherwise.

Long 4 expiring RSI (RSI )(May 17) 5 calls: Roll to the (June 21) 7.5 calls. Stop out on a close below $7.50.

Long 0 MCD (May 17) 275 puts: These puts were stopped out on May 10 when MCD $(MCD)$ closed above $271.

Long 2 SPY SPY (May 31) 516 and Short 2 SPY (May 31) 486 puts: Sell this spread now to close it out, since the equity-only put-call ratios have rolled over to buy signals.

Long 3 expiring AEYE $(AEYE)$ (May 17) 12.5 calls: Roll to the June (21st) 20 calls, and raise the stop to 16.50.

Long 1 SPY (May 24) 517 call and Short 1 SPY (May 24) 534 call: Bought in line with the VIX "spike peak" buy signal of April 22. The May 24 500-517 spread was rolled up to the (May 24) 517-534 spread when SPY traded at 515. Now, sell the current spread and replace it with the simple purchase of 1 SPY (May 24) at-the-money call.

Long 1 SPY (May 31) 524 call and Short 1 SPY (May 31) 540: is the MVB buy signal. The original 500-524 was rolled up on May 15, when SPY traded at 524. Now, close out the existing spread and replace it with the simple purchase of 1 SPY (May 31) at-the-money call.

Long 10 POET $(POET)$ (June 21) 2 calls: The trailing closing stop remains at $1.85.

Long 3 USO USO (June 21) 76 puts: We will hold these puts as long as the put-call ratio is on a sell signal.

Long 1 SPY (June 21) 518 call and Short 1 SPY (June 21) 535 call: Bought in line with the new highs vs. new lows buy signal. This trade would be stopped out if NYSE new lows exceed NYSE new highs for two consecutive days.

Long 1 SPY (May 31) 518 call: this was bought in line with the cumulative volume breadth (CVB) buy signal. Its target was for SPX to trade at a new all-time high, which it has done. So, sell this call now and take the profit.

Long 2 LW $(LW)$ (June 21) 82.5 calls: Hold these calls as long as LW remains on a weighted put-call ratio buy signal.

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 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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May 16, 2024 16:23 ET (20:23 GMT)

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