The S&P 500 index has finally broken out over resistance in the 4170 area – the first time it’s been this high since early May. That was a formidable resistance area for a long time, but Wednesday’s CPI numbers were enough to push it through there.
next targets should be just above 4300, which is the downtrend line for this bear market. Also, SPX’s declining 200-day moving average is in that same area.
Conversely, if this breakout should fail – that is, if SPX should fall back below 4070 – that would be a major bearish reversal.
Meanwhile, SPX is crawling up the upper “modified Bollinger Bands” (mBB). It rose above the +4σ Band on July 29. That set up the possibility of a “classic” mBB sell signal, which was confirmed when SPX closed below the +3σ Band on Aug. 9.
However, we do not trade the “classic” signals. Instead, we wait for further confirmation of a full-fledged McMillan Volatility Band (MVB) sell signal, which has not occurred. SPX would have to close below 4112 in order for that to occur. That seems unlikely to occur anytime soon since this upside breakout has just happened, but it is worth noting.
The stock market’s equity-only put-call ratios remain solidly on buy signals. They continue to fall, and as long as that is the case, it is bullish for the stock market. Neither ratio has fallen far enough to be considered overbought, so this is just a continuing bullish signal.
Perhaps the strongest buy signals have been the breadth oscillators. They remain on buy signals and are in overbought territory. Wednesday was a 90% up volume day on the NYSE. These oscillators can withstand a couple of days of negative breadth without rolling over to sell signals, so this indicator is not likely to reverse quickly.
The one area that is still 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 to a buy signal, there would have to be more than 100 new highs for two days in a row and there would have to be more new highs than new lows. That is all in reference to NYSE data. So it is possible for this indicator to give a belated buy signal, but it has not happened yet.
has continued to decline. As we noted last week, there was a major intermediate-term buy signal in that both VIX and its 20-day moving average closed below VIX 200-day MA. That establishes down trend on the VIX chart. That downtrend is still in place, so this buy signal is still in effect. It would be stopped out if VIX were to rise above the 200-day MA, but that MA is above 24, and VIX is near 19 now, so this buy signal seems likely to remain intact for a while.
Finally, the construct of volatility derivatives is improving. The term structure of the VIX futures
slopes upward through the entire spectrum now, as does the term structure of the CBOE Volatility Indices. Moreover, the VIX futures are all trading at large premiums to VIX. Those are all bullish signs for stocks.
In summary, the bullish evidence that has been mounting for a while is accelerating. We have established a number of long positions in line with confirmed signals. There is still the matter of the negative trend line on SPX (and, to a much lesser extent, the lingering sell signal from new highs vs. new lows). So caution is still warranted.
We will continue to roll long positions up and to tighten stops where appropriate, but we will let these long positions run as long as the underlying buy signals are still in effect.
New recommendation: SPX breakout buy signal
Also as noted in the Market Commentary above, SPX is on the verge of a major upside breakout. NOTE: we are dropping the requirement of a two-day close above 4170, as was the case for this recommendation in last week’s report.
Buy 1 SPY Sept (16th) at-the-money call
And sell 1 SPY Sept (16th) call with a striking price 15 points higher.
If bought, we would stop ourselves out on an SPX close below 4070.
New recommendation: Potential MVB sell signal
There is a possibility of an McMillan Volatility Band sell signal, but it is not imminent. SPX would have to retreat back below the low of the day that the “classic” mBB sell signal was generated – Aug. 9. But one can never be certain about the stock market, so we will leave the recommendation just in case:
IF SPX closes below 4112,
THEN buy 1 SPY Sept (16th) at-the-money put
And sell 1 SPY Sept (16th) put with a striking price 25 points lower.
Should this position be established, it would have a target of the lower, -4σ, Band and would be stopped out buy a move above the +4σ Band. We would keep you apprised of those levels in our weekly reports.
New Recommendation: Signify Health (SGFY)
Option volume in Signify Health
increased significantly following a number of reports that CVS Health
was planning a bid. Stock volume patterns are very strong. There is support at19.
Buy 3 SGFY Sept (16th) 22.5 calls
At a price of 2.35 or less.
SGFY: 23.22 Sept (16th) 22.5 call: 2.00 bid, offered at 2.35
Initially, we will hold without a stop.
All stops are mental closing stops unless otherwise noted.
We are going to implement 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 6 AMLX Aug (19th) 22.5 calls: Raise the closing stop to 22.50.
Long 0 SPY Aug (19th) 398 call and short 0 SPY Aug (19th) 418 call: A SPY call bull spread was originally bought in line with the McMillan Volatility Band (MVB) buy signal, and it was rolled. SPX eventually touched the +4σ Band, and the spread was sold on Aug. 4.
Long 10 CRNT Aug (19th) 2.5 calls: Aviat Networks
announced a revised non-binding proposal to acquire all of the outstanding shares of Ceragon Networks
for $3.08 per share ($2.80 in cash per share, plus $0.28 in equity consideration). Continue to hold for now.
Long 0 COWN Aug (19th) 30 calls: Cowen
received a takeover offer for $39 cash. So these calls were sold, per our recommendation, on Aug. 4.
Long 2 AAPL Sep (16th) 160 calls: These were rolled up when Apple
traded at 160. Roll up again – to the Sept (16th) 170 calls – if AAPL trades at 170 at any time. We will hold these as long as the put-call ratio buy signal remains in effect.
Long 2 SPY Aug (19th) 411 calls and short 2 SPY Aug (19th) 426 calls: These spreads were bought on July 21, when several indicators generated buy signals. Then they were rolled up when SPY
traded at 411 on July 29. We will stop ourselves out of this trade in the following manner: sell half if the breadth oscillators roll back over to sell signals and sell half if the equity-only put-call ratios roll back to sell signals. Both remain on buy signals at this time (see the Market Comment above).
Long 0 SPY Sept (16th) 402 put and short 0 SPY Sept (16th) 377 put: We were stopped out of this position when SPX closes above 4170 on Aug. 10.
Long 3 MRO Oct (21st) 24 calls: We will hold this position as long as the put-call ratio for Marathon Oil
remains on a buy signal.
Long 1 SPY Sept (16th) 414 call and short 1 SPY Sept (16th) 429 call: This was bought in line with VIX beginning to trend down on Aug. 4. We will hold it as long as VIX does not cross back above its 200-day moving average. Specifically, stop yourself out if VIX closes above 24.60 for two consecutive days.
Long 2 OIH Sept (16th) 230 calls and short 2 OIH Sept (16th) 250 calls: We will hold this position as long as the weighted put-call ratio for the VanEck Oil Services ETF
remains on a buy signal.
Send questions to: firstname.lastname@example.org.
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 bestselling book “Options as a Strategic Investment“.
Disclaimer: ©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.
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