This chart shows S&P 500 now faces heavy resistance to more gains

SPX has finally closed the gap at 4017 from when the market started sharply downward in early June. But now the index faces some heavy overhead resistance. First, the trading range between 4070 and 4170 that is shown as a red box on the chart is heavy resistance.

Furthermore, the upper “modified Bollinger Bands” (mBB) are now within reach. Specifically, our McMillan Volatility Band (MVB) buy signal is approaching its target, which is the +4σ Band; that is currently at 4080. So, a touch of that Band will terminate the current buy signal, and a close above that Band will set up an eventual new sell signal.

A close above 4170 by SPX would likely be a reason to upgrade the SPX chart to “bullish.”

Equity-only put-call ratios are presenting something of a problem. Officially, they are still on buy signals, according to the computer programs that we use to analyze these charts. However, to the naked eye, they have both curled upward in the last few days. So I have placed a question mark on each chart, indicating the discrepancy between the computer analysis and what one can see.

It had seemed that these were clearly breaking down when they fell below their June lows, but now that is not so clear now. Anyway, for now, they remain on (weak) buy signals.

Market breadth has remained relatively strong. Both breadth oscillators are on buy signals at this time. The NYSE breadth oscillator continues to be stronger than the “stocks only.” Both oscillators dipped a bit early this week, when the market seemed to be struggling, but now both are back into overbought territory. When SPX is beginning a new leg upward (which one could say is the case currently), then it is a good thing to see the breadth oscillators get overbought.

New 52-week highs vs. new 52-week lows, however, remains mired in a sell signal. This week has seen the number of new highs on the NYSE edge higher, reaching a count of 33 on Wednesday (July 27). But that is still a paltry number, and this indicator remains on a sell signal.

The VIX “spike peak” buy signal of June 15 “expired” last week (that is, it was in place for 22 trading days, and our trading system built around “spike peaks” calls for an exit after that length of time).

The other important facet of the VIX
VIX,
-3.32%
chart, though, is the trend of VIX. That is no longer upward, thus relieving a negative market indicator. This occurred when VIX closed below its 200-day moving average. It first closed below the 200-day MA on July 20 and has continued to close below every day since, save one. This is not a buy signal; it is merely the cessation of a sell signal. If VIX were to cross back above the 200-day MA, the sell signal would be reinstated.

In order get a buy signal from the trend of VIX, the 20-day moving average would have to join VIX and cross below the 200-day MA. That 20-day MA is dropping, and as one can see from the accompanying VIX chart, the 20-day is at about 25.50, while the 200-day is at 24.10 or so.

It is possible that a buy signal could occur in the fairly near future, but it is certainly not guaranteed. In both mid-January and mid-April, the 20-day MA came very close to crossing below the 200-day, but it did not.

The construct of volatility derivatives
VX00,
-0.88%
remains modestly positive in its outlook for the stock market. That is, the term structure of the VIX futures slopes upward, but only for the first four months. The CBOE Volatility Index term structure is not uniformly sloping upward, either, as the short-term 9-day VIX continues to trade above the 30-day VIX.

In summary, the overall picture has improved, but as long as the SPX chart is in a downtrend, we continue to recommend carrying a “core” bearish position. The other indicators’ buy signals can be traded around that “core.” 

New recommendation: ‘Core’ bearish position

As noted in the Market Commentary above, we want to continue to hold a “core” bearish position. Our current such position was stopped out (see the Follow-Up section below) when VIX closed below its 200-day moving average. But since the SPX trend is still downward in the longer term, we are going to add this position:

Buy 1 SPY
SPY,
+1.69%
Sept (16^th) at-the-money put

And sell 1 SPY Sept (16^th) put with a striking price 25 points lower.

We will stop ourselves out of this position if SPX closes above 4170.

New recommendation: Marathon Oil

This recommendation is based solely on the put-call ratio buy signal for Marathon Oil
MRO,
+0.63%.
On the accompanying chart of the weighted put-call ratio for MRO, one can see that the previous two signals (local maxima on the chart) occurred at about the same level as the current one. They were successful, and we thus think this one could be as well.

Buy 3 MRO Oct (21^st) 24 calls

In line with the market.

MRO: 23.88 Oct (21^st) 24 call: 2.56 bid, offered at 2.66

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

Follow-up action

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 (19^th) 22.5 calls: We doubled up on this position last week. Raise the closing stop to 19.50.

Long 1 SPY Aug (19^th) 398 call and short 1 SPY Aug (19^th) 418 call: A SPY call bull spread was originally bought in line with the McMillan Volatility Band (MVB) buy signal, and it has been rolled. It was most recently rolled up when SPY traded at 398, on July 21. Its target is for SPX to touch the +4σ Band, and that is nearing reality.

Long 10 CRNT Aug (19th) 2.5 calls: Hold while the takeover rumors play out.

Long 2 COWN Aug (19^th) 30 calls: The stock has moved higher as the rumors persist. Continue to hold without a stop.

Long 2 AAPL Sep (16^th) 150 calls: We will hold these as long as the put-call ratio buy signal remains in effect. If AAPL trades at 160 at any time, roll up to the Sep (16^th) 160 calls.

Long 2 SPY Aug (19^th) 396 calls and short 2 SPY Aug (19^th) 411 calls: These spreads were bought on July 21, when several indicators generated buy signals. 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)

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 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.