The S&P 500 SPX,
has been in a bearish phase since the mid-summer rally ended near 4,300 points.
The benchmark’s bearish 200-day moving average happened to be nearing 4,300, and the combination of the two not only ended that rally, but appears to have started a decline in stock prices.
Several support areas are broken. There is an island formation on the SPX chart formed by a gap up on August 10th followed by a gap down on August 22nd.
This is a very negative technical formation, and it is rare to see it in an Index. I remember a similar one in the Dow Jones Industrial Average DJIA,
in March 1974 that began the next leg of this bear market, and it is likely that this one will do the same.
Last week, selling broke above support at 4,070, so the next support level is just above 3,900. The selling was strong enough that the SPX are negotiating up to the –4s “modified Bollinger Band” (mBB) this week, and this ends the McMillan Volatility Band (MVB) sell signal that occurred just about two weeks ago.
However, the market would have to move lower — closing below this –4σ Band — in order to create a new MVB Buy signal.
Stock-only sell ratios are ultimately both consensus and sell signals. The weighted The ratio started moving higher – thus creating a sell signal – about 10 days ago. The role model ratio was reluctant to follow and only confirmed the sell signal in the last few days. Since both indicators are rising, this is bearish for the stock market.
Breadth was poor and the Breadth Oscillator sell signals created on August 19th are still valid. However, both amplitude oscillators are now in oversold territory — meaning a buy signal is in the future, but of course it’s too early to say where and when. “Oversold is not a buy” is one of our strongest mottos, and it simply means that an oversold market can continue to decline further than expected.
New 52-week highs are almost non-existent once again (11 on the NYSE yesterday) and so this indicator remains in a sell signal as of last April. Never He made give a buy signal this summer, as many other indicators did.
it has jumped higher this week and that has had some impact on our volatility indicators. First, a VIX “spike peak” buy signal was given as of the close of trading on August 25th, and immediately stopped by a large rally in the VIX on August 26th. a new VIX “spike peak” market signal will be created in the near future.
The second byproduct of this recent rise in the VIX is that the intermediate trend of the VIX buy signal that took place when both the VIX and its 20-day moving average crossed below the 200-day MA in early August is now canceled as the VIX is back above the 200-day MA. This is not However, a sell signal because that would also require the 20-day MA to break above the 200-day MA, which is not imminent. However, the buy signal has been canceled for now.
If the VIX were to fall back below the 200-day MA, the trend the buy signal will be restored. Coincidentally, the level at which both of these VIX buy signals that would occur would be a VIX close below 24.60.
The construct of volatility derivatives remains rather stubbornly in a moderately positive position for equities. That is, the term structure of VIX futures is upward sloping until January and then flat after that.
In summary, we continue to maintain a bearish “core” position, in line with the bearish trend evident on the SPX chart. Around this, individual pointer signals can be exchanged. The market is oversold right now, so take profit spreads or exit where required (for example MVB sell signal), but don’t delay too much just because the market is oversold.
New Recommendation: Potential VIX Buy Signals
As noted above, the VIX is once again in “spiking” mode. A VIX “top-of-the-line” market signal that occurred last week was interrupted for a small loss in just one day. Now another one is being set up. So far this week, the high for the VIX has been 27.69. A VIX close of at least 3 points below its most recent high would create a new “peak top” VIX buy signal. Furthermore, if the VIX closes below its 200-day moving average, this would once again confirm that the trend the VIX is bearish and that is bullish for stocks. So, let’s use a two-tier approach to introduce these positions:
IF VIX closes at least 3.00 points below the highest value reached since August 29,
THEN Buy 1 SPY (Oct 7) in the money call
And Sell 1 SPY Call (Oct 7) at an impressive 15 pips higher.
In addition, if the VIX closes below 24.50, this will restore the trend of the VIX buy signal, buy another SPY spread with the same parameters as mentioned in step 1 above.
New recommendation: Brown-Forman
The call sign for Brown-Forman Corp. BF.B,
is BFB. The call market has been particularly heavy this summer, forcing the call ratio into an extremely bullish (overbought) state. One can see how much lower it is now, where it produces a new sell signal, than it was last year.
Buy 2 BFB Oct (21St) 75 seats
Priced at 4.50 or less
BF.B: 72.08 October (21St) 75 put: offered at 5.20
All postures are mental closing postures unless otherwise noted.
We will apply a “standard” rolling procedure for our SPY spreads: In each vertical bull or bear spread, if the underlying hits the short strike, then roll the entire spread. That would be a roll above in the case of a call bull spread, or roll below in the case of a bear put spread. Stick to the same expiration and keep the same distance between strokes unless instructed otherwise.
Long 10 CRNT September (16u) 2.5 calls: Aviat Networks (AVNW) has offered a price of essentially $3.08 for CRNT, but CRNT is not interested in selling. We passed September last week. Keep holding.
Long 0 AAPL Sep (16u) 170 calls: they stopped when AAPL closed below 166 on 26 August. Overall this was a very profitable trade as we had rolled up twice before.
Long 1 SPY Sept (16u) call 426 and short 1 SPY Sep (16u) 439 calls: Spreads were initially bought on July 21 when several indices produced buy signals. They then wrapped up and finally came out. Sell the spread now as equity-only sell ratios have come back to take sell signals.
Long 3 MRO Oct (21St) 24 calls: we will maintain this position as long as the MRO put-call ratio remains in a buy signal.
Long 0 SPY Sep (16u) call 414 and short 0 SPY Sep (16u) 429 call: bought according to the VIX starting to downward trend on the 4th of August. It was interrupted on August 29 when the VIX had closed above 24.60 for two consecutive days, .
Long 2 OIH September (16u) 230 calls and short 2 OIH Sept (16u) 250 calls: sell this spread now from the weighted The put-call ratio for OIH reverted to a sell signal.
Long 3 SGFY September (16u) 22.5 calls: we’re holding non-stop to see if anyone bids on SGFY. There is no offer yet, but there are supposed to be several parties interested in taking over SGFYwith the highest bid rumored to be around $30.
Long 1 SPY Oct (21St) 396 put and Short 1 SPY Oct (21St) 366 put: this is our “core” bearish position. It fell 30 points on each strike after the SPY traded at 396 this week (according to our general “rollover” rule mentioned above). There are no more openings for this position at this time.
Long 2 SGEN Sept (16u) 170 calls and Short 2 SGEN Sept (16u) 185 calls: this spread was bought after rumors of a takeover by MRK were spreading. Hold those spreads without stopping.
Long 0 SPY Oct (7u) 413 calls and short 0 SPY Oct (7u) 428 calls: this spread was bought at the August 24 $VIX peak buy signalu, but was interrupted on the bank holiday when the $VIX returned to “spiking” mode – where it remains today. See the comment in the newsletter above about taking a new position based on the next “peak” buy signal.
Long 6 CANO Oct (21St) 7 calls: stop yourself at a close below 5.50.
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 best-selling 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 managed by such persons may have positions in the securities recommended in the advisory.