The S&P 500 finally broke above resistance in the 4170 area – the first time it’s been this high since early May. It was a formidable resistance area for a long time, but Wednesday’s CPI numbers were enough to push it through.
The SPX of the S&P,
the next targets should be just above 4300, which is the downtrend line for this bear market. Additionally, the descending SPX 200-day moving average is in the same area.
Conversely, if this breakout were to fail – i.e. if SPX were to fall back below 4070 – it would be a major bearish reversal.
Meanwhile, SPX is climbing into the upper “modified Bollinger Bands” (mBB). It passed above the +4σ band on July 29. This created the possibility of a “classic” mBB sell signal, which was confirmed when SPX closed. underneath the band +3σ on August 9.
However, we do not trade “classic” signals. Instead, we are waiting for further confirmation of a full sell signal from the McMillan Volatility Band (MVB), which has not occurred. SPX would need to close below 4112 for that to happen. It seems unlikely to happen anytime soon since this breakout to the upside just happened, but it’s worth noting.
Stock market put-call ratios remain strong on buy signals. They continue to fall, and as long as they do, it’s bullish for the stock market. Neither ratio has fallen enough to be considered overbought, so this is just a continued bullish signal.
Perhaps the strongest buy signals were the width oscillators. They remain on buy signals and are in overbought territory. Wednesday was a 90% increase volume day on the NYSE. These oscillators can sustain a few days of negative magnitude without turning around to sell signals, so this indicator is unlikely to reverse quickly.
The only area that remains negative is new highs versus new lows. On the NYSE, new 52-week highs continue to lag. There were 61 new highs yesterday. For this indicator to improve into a buy signal, there would have to be more than 100 new highs for two consecutive days and there should be more new highs than new lows. All of this refers to NYSE data. It is therefore possible that this indicator gives a late buy signal, but this has not happened yet.
continued to decline. As we noted last week, there was a strong medium-term buy signal as the VIX and its 20-day moving average closed below the VIX’s 200-day MA. This establishes a downward trend on the VIX chart. This downtrend is still in place, so this buy signal is still in effect. It would be stopped out if VIX were to break above the 200-day MA, but that MA is above 24, and VIX is close to 19 now, so this buy signal looks likely to remain intact for some time.
Finally, the construction volatility derivatives improves. The term structure of the VIX VX00 futures contracts,
maintaining an upward slope across the spectrum, much like the term structure of the CBOE volatility indices. Additionally, VIX futures all trade at significant premiums to VIX. These are all bullish signs for stocks.
In summary, the bullish evidence that has been accumulating for some time is accelerating. We have established a number of long positions online with confirmed signals. There is still the issue of the negative trendline on SPX (and, to a much lesser extent, the persistent sell signal of new highs versus new lows). Caution is therefore still in order.
We will continue to increase long positions and tighten stops where appropriate, but we will let these long positions work as long as the underlying buy signals are still in effect.
New Recommendation: SPX Breakout Buy Signal
As noted in the market commentary above, SPX is on the verge of a major breakout to the upside. NOTE: We are dropping the requirement for a two-day close above 4170 as was the case for this recommendation in last week’s report.
Buy 1 SPY Seven (16e) call for parity
And sell 1 SPY Seven (16e) call with a strike price 15 points higher.
In the event of a buy, we would stop on a close SPX below 4070.
New recommendation: MVB potential sell signal
There is a possibility of a McMillan Volatility Band sell signal, but it is not imminent. SPX is likely to pull back below the low of the day mBB’s ‘classic’ sell signal was generated – August 9th. But you can never be sure about the stock market, so we’ll leave the recommendation just in case:
IF SPX closes below 4112,
THEN buy 1 SPY Sept (16th) put at parity
And sell 1 SPY Seven (16) put with a striking price of 25 points less.
If this position was established, it would have a target of the lower band, -4σ, and would be stopped to buy a move above the +4σ band. We will keep you updated on these levels in our weekly reports.
New Recommendation: Signify Health (SGFY)
Volume of options in Signify Health SGFY,
increased significantly following a number of reports that CVS Health CVS,
was preparing an offer. The inventory volume models are very strong. There is support at 19.
Buy 3 SGFY seven (16e) 22.5 calls
At a price of 2.35 or less.
SGFY: 23.22 September (16e) 22.5 call: 2.00 bid, offered at 2.35
At first, we will hold without stopping.
All stops are mental closing stops unless otherwise stated.
We will implement a “standard” rolling procedure for our SPY spreads: in any bullish or bearish vertical spread, if the underlying hits the short strike, then roll the entire spread. It would be rolling at the top in the case of a call bull spread, or roll down in the case of a bear put spread. Stay in the same exhale and keep the same distance between strikes unless instructed otherwise.
Long 6 AMLX August (19e) Calls 22.5: Raise the closing stop to 22.50.
Long 0 SPY August (19e) 398 call and short 0 SPY Aug (19e) Call 418: A bullish SPY call spread was originally bought in accordance with the McMillan Volatility Band (MVB) buy signal, and it was rolled. SPX finally touched the +4σ band and the spread was sold on August 4th.
Long calls 10 CRNT (August 19) 2.5: Aviat AVNW networks,
announced a amended non-binding proposal to acquire all of the outstanding shares of Ceragon Networks CRNT,
for $3.08 per share ($2.80 in cash per share, plus $0.28 in equity consideration). Keep holding on for now.
Long 0 COWN August (19e) 30 calls: Cowen COWN,
received a takeover bid for $39 in cash. These calls were therefore sold, according to our recommendation, on August 4th.
Long 2 AAPL September (16e) 160 calls: These were rolled up when Apple AAPL,
traded at 160. Ride again – until September 16e) 170 calls – if AAPL trades at 170 at all times. We will hold them as long as the put-call ratio buy signal remains in effect.
Long 2 SPY August (19e) 411 calls and short 2 SPY Aug (19e) 426 calls: These spreads were bought on July 21, when several indicators generated buy signals. Then they were rolled up when SPY SPY,
traded at 411 on July 29. We will stop on this trade as follows: sell half if the width oscillators return to sell signals and sell half if the stock-only put option ratios return to sell signals. Both remain on buy signals for now (see market commentary above).
Long 0 SPY Seven (16e) 402 put and short 0 SPY Seven (16e) 377 set: We were stopped out of this position when SPX closed above 4170 on August 10th.
Long 3 MRO Oct (21st) 24 calls: We will maintain this position as long as the put-call ratio for Marathon Oil MRO,
remains on a buy signal.
Long 1 SPY Seven (16e) 414 call and short 1 SPY Seven (16e) Call 429: This was purchased online with VIX starting at downward trend August 4. We will hold it until VIX returns above its 200-day moving average. Specifically, stop if VIX closes above 24.60 for two consecutive days.
Long 2 OIH Seven (16e) 230 calls and short 2 OIH Seven (16e) 250 calls: We will hold this position as long as the weighted put-call ratio for the VanEck Oil Services ETF OIH,
remains on a buy signal.
Send your questions to: email@example.com.
Lawrence G. McMillan is President of McMillan Analysis, a registered commodity trading and investment adviser. 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 bestselling book “Options as a Strategic Investment”.
Disclaimer: ©McMillan Analysis Corporation is registered with the SEC as an investment adviser and with the CFTC as a commodity trading adviser. The information in this newsletter has been carefully compiled from sources believed to be reliable, but its accuracy and completeness are not guaranteed. Officers or directors of McMillan Analysis Corporation, or accounts managed by such persons, may hold positions in the securities recommended in the advisory.