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Opinion: The S&P 500 is poised to surpass this crucial level and challenge the bear market trendline

Opinion: The S&P 500 is poised to surpass this crucial level and challenge the bear market trendline
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The S&P 500 Index may be on the verge of two major uplegs
SPX,
-0.05%

milestones.

First, the S&P has rallied from that mid-June low to the major resistance at 4170. A two-day close above this level would be quite bullish and would set the stage for a challenge to the downtrend line that defines this bear market and a challenge to the 200-day moving average – both currently near 300.

Second, the trend of the VIX is changing, which would mean a medium-term buy signal. More on that later.

Lawrence McMillan

As the stock market has risen, certain indicators are becoming overbought. They will eventually generate sell signals and we will trade them as soon as they appear.

One of the first is that SPX has now closed above its +4σ “Modified Bollinger Band” (mBB). This will eventually set a “classic” MBB sell signal when SPX eventually closes back below the +3σ band.

However, we would not trade this signal. We will wait and see if there is any confirmation of this ‘classic’ sell which would mean a McMillan Volatility Band (MVB) sell signal. However, it is not necessarily guaranteed that we would act.

In any case, neither the “classic” nor the MVB sell signal has occurred so far.

The pure stock put-call ratios continue to fall and as such both ratios remain bullish on their outlook for stocks. The weighted ratio has been falling faster and is already in the bottom half of its chart. As long as these ratios are falling, it is bullish for the stock market.

Lawrence McMillan

Lawrence McMillan

The breadth has been strong on this rally and both breadth oscillators remain on buy signals – quite deep in the overbought territory. This overbought state is a positive thing in the early stages of a new stock market bull run (and I think we’re still in the early stages of that rally). The latitude oscillators are so high that they could endure a few days of negative latitude and still stay on those buy signals. Eventually, a broad sell signal will come, but it’s not in sight right away.

The only sell signal left is comparing new 52-week highs vs. lows. The number of new highs on the NYSE is still small (25 on Wednesday, and last week’s high was 45 in one day). Thus, this indicator remains negative.

IX
vix,
+1.00%

has continued to slowly decline while the market has risen. Despite this, a major change in the medium-term trend of the VIX appears to be imminent.

The VIX broke below its 200-day moving average last week as it fell below 24. Now the 20-day MA of the VIX is below the 200-day MA. If it holds that cross below it, it would mean that the VIX is trending down (i.e. both the VIX and its 20-day ma are below the 200-day ma).

A downward trending VIX is a medium-term buy signal for the stock market. This is the first time the VIX has trended bearish since last November.

Lawrence McMillan

The construct of volatility derivatives
VX00,
-5.81%

has also improved. It was mildly bullish for stocks but is now taking a fully bullish stance. The tenor structure of VIX futures is consistently up (it’s a bit flat on the other end). The maturity structure of the CBOE volatility indices is also positive.

To sum up, if the SPX closes above 4170 for two consecutive days, a core bearish position is no longer warranted and that could happen very quickly. In the meantime, we continue to hold our various long positions bought in line with our indicators. Eventually we’ll start seeing sell signals, but they haven’t surfaced yet.

New recommendation: VIX trend buy signal

As mentioned in the market commentary above, the VIX is close to providing a key medium-term buy signal for stocks as it starts to trend down. We want to trade this signal:

IF VIX closes today below midnight,

THEN buy 1 SPY Sept (16th) call at money

And sell 1 SPY Sept (16th) with a significant price of 15 points higher.

Once this position is established, we will hold it as long as $VIX fails to cross back above its 200-day moving average. Specifically, stop if the VIX closes above 24.60 for two consecutive days.

New recommendation: SPX breakout buy signal

As also mentioned in the market commentary above, SPX
SPY,
-0.06%

is about to make a major breakout to the upside.

IF SPX closes over 4170 for two consecutive days,

THEN buy 1 SPY Sept (16th) call at money

And sell 1 SPY Sept (16th) with a significant price of 15 points higher.

If buying, we would stop at an SPX close below 4070.

New recommendation: VanEck Oil Services ETF

This recommendation is based solely on the buy signal of the put-call ratio for the VanEck Oil Services ETF
OIH,
-2.74%
.
As can be seen from the attached chart, previous buy signals have come at the right time over the past year. Since these are high-priced options, we use a call bull spread.

Buy 2 OIH Sept (16thth) 230 calls

And sell 2 OIH Sept (16th) 250 calls

In line with the market.

OIH: 231.85 Sept (16th) 230-250 Call Bull Spread: 8.30 bid, offered at 9.30

We’ll hold this position as long as they do weighted The OIH put-call ratio remains at a buy-signal.

Lawrence McMillan

follow-up action

All stops are mental closure stops unless otherwise noted.

We will implement a “standard” rolling procedure for our SPY spreads: if the underlying asset hits the short strike on any vertical bull or bear spread, the entire spread will be rolled. That would be a role see in the case of a call, bull spread or roll Low in the case of a bear put spread. Stay in the same expiration and keep the same distance between strikes unless otherwise specified.

Long 6 AMLX Aug (19th) 22.5 calls: Raise the closing stop to 9:50pm.

Long 1 SPY Aug (19th) 398 Call and Short 1 SPY Aug (19th) 418 calls: A SPY Call Bull Spread was originally bought in line with the McMillan Volatility Band (MVB) buy signal and was rolled. It was last rolled up when SPY was trading at 398 on July 21st. His goal is for SPX to touch the +4σ band and it has, so sell this spread now.

Long 10 CRNT Aug (19th) 2.5 Views: aviation networks
AVNW,
-0.10%

announced that it has submitted a revised non-binding offer to acquire all outstanding shares of Ceragon Networks
BLACK,
-3.26%

for $3.08 per share ($2.80 in cash per share, plus $0.28 in equity). Hold on for now.

Long 2 COWN Aug (19th) 30 calls: The enterprise
KUHN,
+0.16%

received a tender offer for $39 in cash. Sell ​​these calls at a price of 8.20 or more; Leave the rest to the risk arbs.

Long 2 AAPL Sep (16th) 160 calls: This position was rolled out at Apple
AAPL,
-0.46%

traded at 160. We will hold these as long as the put-call ratio buy signal remains in effect.

Long 2 SPY Aug (19th) 411 calls and briefly 2 SPY Aug (19th) 426 calls: These spreads were bought on July 21st when several indicators generated buy signals. Then they were rolled as SPY was trading at 411 on July 29th. We will back out of this trade in the following way: sell half when the breadth oscillators roll back to sell signals and sell half when the put call is just stock ratios roll back to sell signals. Both currently remain on buy signals (see market commentary above).

Long 1 SPY Sept (16th) 402 put and short 1 SPY Sept (16th) 377 times: Stop this position if SPX closes above 4170.

Long 3 MRO Oct (21Section) 24 calls: We will hold this position for as long as Marathon Oil’s put-call ratio lasts
MRO,
-4.85%

stays on a buy signal.

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 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 accuracy and completeness are not guaranteed. Officers or directors of McMillan Analysis Corporation, or accounts maintained by such persons, may have positions in the securities recommended in the recommendation.

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