Stock Market Analysis Today – Opinion: Stock-market bears fail to seize control after S&P 500 support breaks

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Stock Market Analysis Today – Opinion: Stock-market bears fail to seize control after S&P 500 support breaks

The S&P 500 index broke down below significant support areas in the past week. However, as has been the case for several months, the bears have not been able to keep control even after a significant breakdown such as the one that just occurred.

That significant support level was at 4370, where three declines had ended previously. But on Monday, the S&P
SPX,
+1.38%
blew right through there and declined to nearly 4300. More importantly, it closed below 4370.

However, SPX has continued to rise since then and is now about to close the gap on its chart at 4430 (circled on the accompanying price chart). If SPX closes above 4430, that would be a strong showing for the bulls, even though it would still leave some overheard resistance (up to 4490) and would still be below the now-declining 20-day moving average.  

So the bulls would still have to overcome some resistance, but that has been the case in each mid-month decline dating all the way back at least May and has not been a problem yet.


Lawrence McMillan

During the decline, SPX closed below the -4σ “modified Bollinger Band” (mBB). That finally completes the previous McMillan Volatility Band (MVB) sell signal from early July. Moreover, it sets up a new potential buy signal. SPX closed just above the -3σ Band on Wednesday, so that is a “classic” mBB buy signal. However, the MVB buy signal requires more confirmation. It is not far away at this point.

Equity-only put-call ratios remains mixed. The standard ratio continues to decline and thus remains on a buy signal. The weighted ratio is rising, which means it’s on a sell signal. Not only that, but it has broken out to new relative highs in the past week.

While there might be ways to explain this disparity, it is something we don’t usually see, and it will likely pass after a short period of time.


Lawrence McMillan


Lawrence McMillan

Breadth was sharply negative during the market decline, and both breadth oscillators were on sell signals. They descended into deeply oversold territory. Now, with strong positive breadth in the last two trading days, the NYSE-based oscillator has rolled back over to a buy signal as of the close of trading on Wednesday. The “stocks only” oscillator is nearing a buy signal as well but hasn’t quite reached that level yet.

About a week ago, a similar situation existed, but the buy signals weren’t forthcoming. We’ll see if that changes this week.

Cumulative breadth indicators have not improved, though, so the negative divergence that we have been talking about since early June is still in place. As we’ve noted before, that is not a sell signal per se, but it is a warning sign.

New 52-week highs on the NYSE were slightly outnumbered by new 52-week lows on a couple of days this past week, but never by enough to generate a sell signal. New lows were somewhat more prevalent in “stocks only” and NASDAQ data, but those are not what we base our signals on.

The entire volatility complex continues to support the bullish case, for the most part. Yes, VIX did spike up on Monday, but immediately spiked back down, thus creating a new VIX “spike peak” buy signal.

Moreover, the trend of VIX has not turned bearish; that would require both VIX and its 20-day moving average closing above the 200-day MA. The 20-day MA is rising while the 200-day is moving sideways, but the two remain over a point apart. The 200-day MA is right at 20, so a VIX close below there would be further fodder for the bulls.

The construct of volatility derivatives never turned bearish, although it came close. On Monday, the front-month October VIX futures
VIX,
-9.15%
nearly overcame the November VIX futures, but eventually did not. So, for now, there has been no inversion in the prices of the two front months. Moreover, the terms structures continue to slope upward, so that is bullish, too.

Finally, there has been a new sell signal from realized volatility. We use the S&P’s 20-day historical volatility (HV20) to determine this. Since HV20 had previously fallen below 8%, that set up a sell signal which was confirmed this week when HV20 close above 10%. It is 11% now. This sell signal would be stopped out if HV20 dropped back below 9%.


Lawrence McMillan

In summary, there are mixed signals, but the breakdown below support should have had more negative implications. If SPX closes the gap and closes above 4430, that would mean the bears no longer control the short term. We will continue to trade signals as they are confirmed – both buys and sells.

New recommendation:  MVB potential buy signal

Since SPX closed below the -4σ mBB and then closed above the -3σ Band, that means that a “classic” mBB buy signal has occurred. If SPX closes above 4430, that would complete the buy signal.

IF SPX closes above 4430,

THEN buy 1 SPY Oct (29th) at-the-money calls

             And sell 1 SPY Oct (29th) with a striking price 13 points higher.

If bought, the MVB buy signal will remain in effect until SPX trades at either of the +/-4σ Bands. After the last signal in early July, it took over two months for SPX to do that, so this is probably not a short-term signal.

New recommendation: new VIX “spike peak” buy signal

VIX spiked up on Monday, but immediately spiked right back down again, confirming a new VIX “spike peak” buy signal as of Tuesday. If you have not already done so,

Buy 1 SPY Oct (22nd) at-the-money calls

And sell 1 SPY Oct (22nd) call with a striking price 13 points higher.

This spread will be held for 22 days or until VIX re-enters “spiking mode” (a gain of at least 3.00 VIX points over any one-, two-, or three-day period, using closing prices). If it does re-enter “spiking mode,” that would then set up yet another “spike peak” buy signal as soon as the next spike is completed.

Follow-up action

All stops are mental closing stops unless otherwise noted.

Long 1 RAPT Oct (15th) 35 call: Continue to hold without a stop.

Long 1 SPY Oct (15th) 440 put and short 1 Oct (15th) 415 put: This spread was bought in line with the equity-only put-call ratio sell signals. Those put-call ratio signals are now mixed, but with the weighted ratio remaining on a sell, we are continuing to hold this spread.

Long 0 STAR Oct (15th) 25 calls: This position was stopped out on Wednesday.

Long 0 SPY Sept (24th) 453 calls: A call spreadwas bought in line with the VIX “spike peak” buy signal of Aug. 19 and was rolled up. These calls were stopped out with VIX returned to “spiking mode” on Monday.

Long 3 LDOS Oct (15th) 100 calls: These calls were bought in line with a weighted put-call ratio buy signal for Leidos
LDOS,
+1.30%,
which is still in effect. Continue to hold as long as the put-call ratio buy signal is in place.

Long 3 PCAR Oct (15th) 82.5 calls: These calls were bought in line with a weighted put-call ratio buy signal for Paccar
PCAR,
+2.20%,
which is still in effect. Continue to hold as long as the put-call ratio buy signal is in place.

Long 2 IWM Oct (15th) 224 puts and short 2 IWM Oct (15th) 209 puts: These were bought in line with the breadth oscillator sell signals. Those sell signals are still in effect, but just barely. If NYSE breadth is positive on Thursday, exit this spread. Otherwise, hold for an update next week.

Long 2 ETN Oct (15th) 165 puts: These puts were bought in line with a weighted put-call ratio sell signal for Eaton
ETN,
+0.97%,
which is still in effect. Continue to hold as long as the put-call ratio sell signal is in place.

Long 3 CTXS Oct (22nd) 112 calls: The closing stop remains at 107.

Long 3 SPY Oct (15th) 434 puts and short 3 SPY Oct (15th) 409 puts: These put spreads were bought in line with the recommendations in last week’s newsletter, which were activated on Monday. Stop yourself out if SPX closes above 4430.

Send questions to: [email protected]

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.

 Stock Market Analysis Today – Opinion: Stock-market bears fail to seize control after S&P 500 support breaks