Bulls need a lot of help but the stock market isn't willing to give it

MW Bulls need a lot of help but the stock market isn't willing to give it

By Lawrence G. McMillan

S&P 500 is facing resistance to move higher; 5,370 is the number to watch

The S&P 500 Index SPX, finally broke out of the trading range that it had been in for nearly three weeks. To the surprise of many, that breakout came on the downside. This leaves a heavy resistance area between 5,560 and 5,650 (red box on the accompanying SPX chart). It's interesting to note that the resistance area is just below the all-time high (5,670). All of this represents a formidable impediment to making new all-time highs. It can still be done, of course, but it's going to be harder than first thought.

There is a gap from 5,463 to 5,00 on the SPX chart (circled on the chart), and it would probably be constructive if that gap were filled. However, if this "correction" proceeds much further than that - specifically, if it breaks below 5,370 - then much heavier selling is likely to enter the market.

The McMillan volatility band $(MVB.AU)$ buy signal is still in effect (green "B" on the SPX chart). Its target remains the upper, +4<SIGMA> band, which is still at roughly 5,750 and moving sideways.

Equity-only put-call ratios have continued to decline, despite the heavy selling of Sept. 3, which somewhat surprisingly was not accompanied by a huge increase in put volume. Thus, the ratios remain on buy signals for now.

Market breadth was quite poor on Sept. 3 and for the first time in a while, it is possible that the breadth oscillators are going to roll over to sell signals. "Stocks only" breadth continues to be worse than NYSE breadth. We require a two-day confirmation of any change in the breadth signals, and that has not occurred yet. But if breadth is negative over the next few days, it is highly likely that this indicator - which has been bullish since mid-August - will turn negative.

New highs on the NYSE continue to dominate new lows. That keeps this indicator in the bullish camp. It will only relinquish that status if new lows exceed new highs for two consecutive days.

Realized volatility continues to decline. Our measure for this statistic is the 20-day historical (realized) volatility of SPX (HV20), and it had reached a peak of 23% a few weeks ago. The effects of the trading range have taken its toll, though, and despite a large move on Sept. 3, this indicator is back down to 16%. A close at 15% or lower will remove this as a potentially bearish indicator for stocks.

The sharp drop in the market had the effect of seeing VIX VIX rise sharply. Thus, VIX is back in "spiking mode." That stops out the previous "spike peak" buy signal, and it will eventually lead to another such buy signal. Specifically, when VIX closes at least 3.0 points below the highest price that it has reached from Sept. 3 onwards, that will be a new "spike peak" buy signal.

Conversely, the trend of VIX sell signal remains in place, since VIX never closed below its 200-day moving average $(MA)$ (which remains at 14.50 and is moving sideways).

Finally, the construct of volatility derivatives remains bullish for stocks. Despite the heavy selling on Sept. 3, the term structures continue to slope upwards. At the current time, the term structure of the CBOE volatility indices is probably a better measure than the term structure of the VIX futures, because of the "election bump" in implied volatility, as evidenced by the October VIX futures.

In summary, the indicators remain mixed, but the S&P 500 has fired a warning shot to the bulls. We will continue to trade any signals that are confirmed, both for entry and exit. The key level to watch right now is 5,370: a close below there will be very negative.

New recommendation: Potential 'spike peak' buy signal

If VIX closes at least 3.0 points below the highest price that it reached from Sept. 3 forward, then buy 1 SPY SPY (Oct. 18) at-the-money call and sell 1 SPY (Oct. 18) call with a striking price 20 points higher.

The sudden drop in the market on Sept. 3 caused VIX to spike higher. This sets up the next "spike peak" buy signal. When this spread is bought, we will hold for 22 trading days, or until VIX makes a higher high, in which case the spread would be stopped out.

New recommendation: Dentsply Sirona $(XRAY)$

The conditional buy in Dentsply Sirona (XRAY) was not fulfilled last week, but the recommendation is still in place for the coming week.

If XRAY closes above 26, then buy 4 XRAY (Oct. 18) 25 calls, in line with the market. If bought, we will hold as long as the weighted put-call ratio is on a buy signal.

New recommendation: Walgreens Boots Alliance $(WBA)$

This 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, other than to say that stocks that have been removed from the Dow Jones Industrial Average DJIA usually experience a strong rally within a matter of weeks after that removal.

WBA was obliterated after the latest earnings report. The potential MVB buy signal was canceled. So, we adjusted our entry points: If WBA closes above 10.60, then buy 2 WBA (Sept. 20) 10.5 calls, in line with the market.

Follow-up actions:

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 2 FIVE $(FIVE)$ (Sept. 20) 65 puts: We are holding without a stop for now.

Long 2 AKAM $(AKAM)$ (Sept. 20) 100 calls: This position will be held as long as the AKAM weighted put-call ratio remains on a buy signal. These calls were rolled up when AKAM traded at 100.

Long 0 RHI $(RHI)$ (Sept. 20) 65 calls: These calls were stopped out when RHI closed below 61.80 on Sept. 3.

Long 1 SPY (Sept. 20) 542 put and short 1 SPY (Sept. 20) 502 put: This spread was bought in line with the equity-only put-call ratio sell signals. This spread recovered some value as we had hoped. Sell the spread now to close the position.

Long 1 SPY (Sept. 20) 512 put and short 1 SPY (Sept. 20) 470 put: This put spread is based on the trend of VIX sell signal and would be stopped out if VIX closes below its 200-day MA for two consecutive days.

Long 1 SPY (Sept. 20) 546 call and short 1 SPY (Sept. 20) 566 call: This spread was taken in line with the VIX "spike peak" buy signal and then rolled up. Sell this spread now, since VIX has returned to "spiking" mode, and we will re-enter a long position on the next "spike peak" buy signal.

Long 1 SPY (Oct. 18) 553 call and short 1 SPY (Oct. 18) 573 call: This spread was bought at the close of trading on Aug. 15, when NYSE new highs numbered more than 100 for the second consecutive day. It would be stopped out if, on the NYSE, new lows outnumber new highs for two consecutive days.

Long 3 CMG $(CMG)$ (Sept. 20) 52 calls: We will hold as long as the weighted put-call ratio of CMG remains on a buy signal.

Long 1 SPY (Oct. 18) 559 call and long 1 SPY (Oct. 18) 559 put: This is a long straddle, intended to capture a large move in either direction. Roll either side if it gets 10 points in-the-money; just alter the strike, not the expiration date.

Long 2 AOS$(AOS)$ (Oct. 18) 80 calls: We will hold these calls as long as the weighted put-call ratio remains on a 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 the best-selling book, Options As A Strategic Investment. www.optionstrategist.com

Disclaimer:

(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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September 05, 2024 07:11 ET (11:11 GMT)

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