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The stock market, as measured by the S&P 500 Index
SPX,
is struggling to maintain some bullishness after bouncing off support at 4200 (and also bouncing off its 200-day Moving Average at the same time). There are certainly headwinds presented by yet another Mideast crisis, but the technical picture presents problems of its own.
First of all, the chart of SPX is still in a downtrend. The patterns of lower highs and lower lows has not been broken. The downtrend line is current at 4430 and falling. Second, there is still the gap on the SPX chart; until that is filled by SPX rising above 4401.60, it is a negative factor, too. Finally, the market stalled out for six consecutive days in the general area of 4380 over the past week, so that represents near-term resistance.
Not everything is negative regarding the SPX chart, though, since the recent McMillan Volatility Band (MVB) buy signal (green “B” on chart) is still in place.
To summarize the SPX chart, it is still a negative pattern until at least the gap is filled at 4401.60, and preferably the downtrend line is broken. So, a “core” bearish position is in place until those things occur. Meanwhile, a drop below 4200 would be extremely negative.
Equity-only put-call ratios have been somewhat split in their outlook recently. The standard equity-only put-call ratio rolled over to a buy signal about a week ago, and one can see that it is still declining from its recent peak. However, the weighted ratio and the total ratio did not generate buy signals and are now making new relative highs on their charts. Hence, they remain on sell signals and will do so until they roll over and begin to trend downward.
Market breadth attempted to improve after SPX bounced off the 4200 level in early October. In fact, buy signals were registered by the breadth oscillators on October 10th, only to be negated a few days later. So, the whipsaw syndrome that plagued these oscillator signals earlier in the year is still in evidence. Now, another buy signal is attempting to set up, but it is tentative and we are not going to trade it at this time.
New Lows on the NYSE have maintained clear dominance over New Highs in the past week. In fact, there have been more than 100 New Lows every day in the last five trading days, and there were more than 250 New Lows yesterday. This indicator remains on a sell signal. That sell signal would be stopped out if New Highs on the NYSE outnumber New Lows for two consecutive days.
The volatility complex is showing mixed signals as well. First, another VIX
VIX
VX00,
“spike peak” buy signal was generated this past week. It is marked in orange on the VIX chart below. We don’t trade the overlapping signals, which this one is, since the original “spike peak” buy signal was generated earlier in October. That signal lasts for 22 trading days, but it would be stopped out if VIX were to close above 20.88, its most recent high “print.”
However, there is a negative aspect of the VIX chart as well. A new trend of VIX sell signal has been generated, denoted by the circle on the right-hand side of the VIX chart. It occurs when both VIX and its 20-day moving average are above the 200-day moving average. This is the first such sell signal since the one in September 2022 (similar circle on the left-hand side of the chart). Currently VIX is only a small distance above the 200-day, and I would prefer more separation before declaring this to be a full-fledged intermediate-term sell signal, but it is certainly beginning to look like one.
The construct of volatility derivatives remains modestly bullish for stocks, since the term structures of both the VIX futures and of the CBOE Volatility Indices continue to slope upwards. October VIX futures expired yesterday, so November is now the front month. Hence the relationship to watch is that between November and December VIX futures. If November begins to trade above December, that would be a negative warning sign, but this does not appear to be in imminent danger of happening.
In summary, we are holding a “core” bearish position and are rolling expiring bearish positions since their sell signals are still in place. We are, however, trading other confirmed signals around that “core” bearish position.
Market insight: October seasonal trade
Long-time readers know that we sometimes trade a favorable seasonal trade near the end of October. But for it to set up, a decline of 3.2% must have occurred sometime during October. So far that has not been the case. The most recent SPX high was 4393.50, so a decline to 4252.90 would set up the seasonal trade. That is still possible but time is running short. The seasonal trade is entered on October 27th, so unless a decline of that magnitude takes place in the next week, we will not be trading the seasonal this year. We will update the situation in next week’s report.
New recommendation: Consumer staples SPDR (XLP)
A McMillan Volatility Band (MVB) buy signal has been issued by this ETF (yes, the MVB signals can be applied to any chart). It has a good track record of buy signals, so we are going to act on this signal.
IF XLP closes above 68.04, then buy 4 XLP Dec (1st) 68 calls in line with the market.
XLP: 67.94
If bought, the position would be stopped out if XLP closed below its -4σ “modified Bollinger Band.” We will update the situation weekly. The target is for XLP to trade at the upper +4σ Band, which is currently at 70.50, but which would reverse upward if XLP begins to rally. See the similar buy signal about a year ago on the XLP chart.
Follow-up action:
All stops are mental closing stops unless otherwise noted.
We are using 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 8 expiring CRON
CRON,
Oct (20th) 2 calls: Sell these calls and do not replace them. The takeover rumors may still be in place, but the lack of positive action leads us to believe that we should exit.
Long 1 expiring SPY
SPY
Oct (20th) 428 put: Bought in line with the equity-only put-call ratio sell signals. We are going to hold a put until the weighted ratio rolls over to a buy. Since the weighted ratio is still on a sell, roll this put out to the Nov (10th) 28 put. Roll down every time this put becomes at least 8 points in-the-money. In essence, this is our “core” bearish position.
Long 2 expiring EQR
EQR,
Oct (20th) 60 puts: Continue to hold as long as the weighted put-call ratio for EQR remains on a sell signal. Roll to the Nov (17th) 60 puts.
Long 3 X
X,
Oct (13th) 31 calls: We didn’t address this position last week, when it expired, so the assumption is made that the calls were exercised since they were in-the-money at expiration. Sell the stock now, to close the position.
Long 1 expiring SPY Oct (20th) 428 put and Short 1 SPY Oct (20th) 408 put: Established in line with the “New Highs vs. New Lows” sell signal. Stop out if New Highs outnumber New Lows on the NYSE for two consecutive days. Since this signal has not been stopped out, sell the spread that is owned, and buy 1 SPY Nov (10th) 428 put to replace it.
Long 3 CHEF
CHEF,
Nov (17th) 20 puts: Lower the trailing stop to 20.20.
Long 2 DLR
DLR,
Nov (10th) 118 puts: Hold these puts as long as the DLR weighted put-call ratio is on a sell signal.
Long 1 SPY Nov (17th) 430 call and Short 1 SPY Nov (17th) 445 call: This position was bought in line with the VIX “spike peak” buy signal of October 6th. Hold for 22 trading days. Stop out if VIX closes above 20.88.
Long 3 XLE
XLE
Nov (17th) 86 puts: Hold as long as the weighted put-call ratio of XLE remains on a sell signal.
Long 1 SPY Nov (17th) 434 call short 1 SPY Nov (17th) 452 call: This spread was bought in line with the CBOE Equity-only put-call ratio buy signal. We are holding without a stop initially. Roll the whole spread up if the long side becomes at least 8 points in-the-money.
Long 3 ES
ES,
Nov (17th) 60 calls: Hhold this position as long as the weighted put-call ratio chart for ES remains on a buy signal.
All stops are mental closing stops unless otherwise noted.
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 best-selling book, Options as a Strategic Investment. www.optionstrategist.com
©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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