The stock market is riding an oversold rally for now. Here's when it stalls out.

MW The stock market is riding an oversold rally for now. Here's when it stalls out.

By Lawrence G. McMillan

Watch the S&P 500's 20-day moving average, now at 5,780 and falling rapidly

The S&P 500 index SPX is trying to rebound from severely oversold conditions. The most recent low was near 5,500, but there were several daily lows in the 5,500 to 5,540 range, so that entire area can be considered as support.

The typical oversold rally extends to a declining 20-day moving average, which for the S&P 500 is currently at 5,780 and falling rapidly. Also, expect overhead resistance in the 5,770 area, which had previously been a support.

A potential McMillan Volatility Band $(MVB.AU)$ buy signal is at hand, which is why there is a green "B?" on the above SPX chart. SPX closed below the -4<SIGMA> "modified Bollinger band" (mBB) on several days. When it closed above the -3<SIGMA> band on March 17, a "classic" mBB buy signal was generated. We don't trade those, though, because of their history of whipsaws. Rather, we require further price confirmation for a full MVB buy signal. That would be attained if SPX were to trade at 5,730 or higher.

Equity-only put-call ratios continue to rise, as there has been little letup in the pace of put buying. Both ratios are reaching the higher levels of their charts now, which is an oversold condition for the stock market. The weighted ratio is above the highs of last year and is at its highest level since the end of the 10% stock-market correction in the fall of 2023. These ratios will not generate buy signals until they roll over and begin to decline.

Market breadth has improved enough that both breadth oscillators are now on buy signals. These have been "certified" with a two-day confirmation.

In addition, new highs on the New York Stock Exchange outnumbered new lows for two consecutive days, so the sell signal from this indicator was stopped out on March 18. This returns the indicator to a neutral state. It is not on a buy signal or a sell signal at this time. The next signal will occur when either new highs or new lows number more than 100 for two consecutive days on the NYSE.

The Cboe Volatility Index VIX is giving a mixed picture. On one hand, the most recent "spike peak" buy signal of March 12 is doing well and is still in place. That will be held for 22 trading days unless stopped out by VIX closing above its most recent peak of 29.57. Conversely, the trend of VIX sell signal is still in place as well, since both VIX and its 20-day moving average are above the 200-day moving average. This sell signal would be stopped out if VIX were to close back below its 200-day moving average, which is currently just above 17.

The construct of volatility derivatives has not returned to a bullish status. The term structure of the VIX futures is flat, whereas it would be upward-sloping if it were bullish. The March VIX futures expired, so April is now the front month. We are thus comparing the price of April and May futures to see if there is the beginning of an inversion. Currently, April is trading 15 cents above May, which is slightly bearish. A larger inversion, in fact, would be fully bearish for stocks. Meanwhile, the VIX term structure is more upward-sloping and is thus a more bullish indicator for stocks.

In summary, this appears to be an oversold rally that will stall out once SPX crosses above its 20-day moving average. We are trading confirmed signals as they occur, and if enough are generated, this could then become something more than a mere oversold rally. Continue to roll options that are deeply in-the-money.

Potential MVB buy signal

As noted above, a "classic" mBB buy signal has occurred. We don't trade those, but they do set up the possibility of an MVB buy signal, which we do trade.

If SPX trades above 5,730 at any time, then buy 1 SPY (April 17) call and sell 1 SPY (April 17) call with a striking price 20 points higher.

If this spread is bought, then this is a fairly long-term position. We will hold with an upside target of the +4<SIGMA> band but would be stopped out by an SPX close below the -4<SIGMA> band.

New recommendation: BXP

A new weighted put-call ratio has been generated in BXP Inc. $(BXP)$. We want to see some price confirmation from the stock itself before buying calls.

If BXP closes above $70, then buy 3 BXP (May 16) 70 calls in line with the market.

We will hold the position as long as the weighted put-call ratio for BXP remains on a buy signal.

Follow-up action:

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.

Also, for long options, roll if they become 8 points in-the-money.

Long 1 expiring SPY (March 21) 607 call and long 1 SPY (Apr. 4) 555 put: We originally bought a straddle, and then later rolled the put down several times, eventually winding up in the above spread position.

Long 2 expiring ALL (March 21) 200 calls: roll to the ALL (Apr. 17) 210 call. We will hold these Allstate $(ALL)$ calls as long as the put-call ratio buy signal is in place.

Long 10 expiring WEAT WEAT (March 21) 5 calls: roll to the WEAT (April 17) 5 calls. We will hold these Teucrium Wheat Fund calls as long as the put-call ratio buy signal is in place.

Long 6 VIX (April 2) 29 calls: Stop out if VIX closes below its 200-day moving average for two consecutive days.

Long 1 SPY (April 17) 554 call and short 1 SPY (April 17) 574 call: This position was bought in line with the most recent VIX "spike peak" buy signal. It would be stopped out if VIX were to close above that most recent peak of 29.57. Otherwise, by the rules of the trading system that we have built around these "spike peaks," we will hold for 22 trading days.

Long 1 SPY (March 28) 570 call and short 1 SPY (March 28) 585 call: The 562-577 call bull spread was bought at the close of trading on March 14, when VIX closed below VIX3M. Our instructions were to roll both calls up if the lower call becomes 8 points in-the-money or more, which it did on March 19, when SPY traded above 570, so the spread was rolled to the 570-585 spread. Continue to roll up if the long side of the spread becomes 8 points in-the-money. The position is intended to be held one week, so sell it at the close of trading on March 21.

Long 2 APH (April 17) 65 calls: Were bought when Amphenol $(APH)$ closed above 65 on March 19. We will hold as long as the weighted put-call ratio for APH 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 "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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March 20, 2025 14:06 ET (18:06 GMT)

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