The S&P 500 index traded at new yearly lows late last week. That keeps the pattern of lower highs and lower lows intact, which means that this is still a bear market. However, after the three-day weekend, prices rallied, due in large part to massively oversold conditions, and the S&P is trying to find a trading floor to launch an oversold rally.
Bear markets are punctuated by oversold rallies, and the last one in late May was a dud. However, the next one has a chance of being a bit better as it looks like additional oversold buy signals may be confirmed relatively soon.
This oversold rally won’t end the bear market (although it eventually will), but oversold rallies generally top the 20-day declining moving average, which is currently sitting at 3960. There are also two gaps in the S&P SPX,
chart, the second of which would be filled by the index trading at 4017. So that is kind of a target for the next oversold rally.
The sharp drop on June 16th pushed SPX low enough to close below its “Modified Bollinger Band” (mBB) of -4σ. That was the precursor to a “classic” mBB buy signal, which occurred on Tuesday, when SPX closed up the -3σ mBB.
However, for this to be a full McMillan Volatility Band (MVB) buy signal, additional confirmation is required: SPX must close above 3780, the June 21 high. If that happens, this will be MVB’s first buy signal since late January. The objective of an MVB buy signal is to touch the +4σ band. That MVB buy signal from previous January hit its target in late March, so it may take a while.
Equity-only put-call indices rose last week, casting doubt on the index’s trend. They are now starting to drop again but need to break below the early June lows to get back to confirmed buy signals IMO. There is a small horizontal red line on each of the put-call charts indicating this. The fact is that selling volume is still relatively high despite the recent market recovery attempt, but if these indices drop to relatively new lows (i.e. below the lows of early June), that will solidify a buy signal.
The breadth of the market has remained poor, so the amplitude oscillators have remained in sell signals, albeit in deeply oversold territory. However, they are one strong amplitude day away from moving into buy signals, so it is an indicator worth paying close attention to at this point.
For example, if there are at least 800 more advances than declines on the NYSE on Thursday, then the NYSE amplitude oscillator will have switched to a confirmed buy signal.
New 52-week highs remain basically non-existent in all of our data sets. In seven of the last eight trading days, there have only been new single-digit highs on the New York Stock Exchange. As a result, this indicator remains in a sell signal and is also deeply oversold.
spiked on last week’s broad market decline and gave a “peak peak” buy signal on June 15, and there was a second overlapping “peak peak” buy signal on June 17. We only trade the first signal, although both are marked on the attached VIX chart. So, this is the only confirmed trading signal that we have at the moment.
This short-term positive signal from the VIX is offset by the fact that the medium-term trend in the VIX remains bullish, and that is bearish for stocks. That uptrend would only be broken if the VIX closed below its 200-day moving average, which is currently rising and just below 24. This VIX medium-term downtrend has been around since early last December (locked in a circle). on the VIX chart).
The construction of volatility derivatives is slightly improving. The term structure of VIX futures is again on an upward slope in the first few months, before easing further down the curve. The term structure of the CBOE volatility indices has a similar shape. So this is at least not bearish for stocks, although I wouldn’t say it’s totally bullish either.
Our “core” position remains bearish, due to the downtrend in SPX and the uptrend in VIX. However, we will be trading confirmed oversold buy signals around that “core” position, and we are starting to see the possibility of them happening soon.
New Recommendation: Potential MVB Buy Signal
As noted in the comment above, a “classic” mBB buy signal has already occurred, so all that is needed to confirm a McMillan Volatility Band (MVB) buy signal is for SPX to close above the maximum of the day in which the classic signal occurred:
IF SPX closes above 3780,
THEN buy 1 SPY Aug (19the) at-the-money call
and sell 1 SPY Aug (19the) call with an attractive price 20 points higher.
If this buy signal occurs, your goal will be for SPX to touch the +4σ Band. The signal would stop if SPX closed below the -4σ band.
New Recommendation: Potential Breadth Buy Signal
As also noted in the market comment above, the amplitude oscillators are improving and could confirm a buy signal with a strong positive amplitude day.
As of Thursday’s trading, keep a running total of the daily gains minus the drops on the New York Stock Exchange. If that total reaches +800 or more at the close of any trading day, then a buy signal from the NYSE amplitude oscillator will have occurred and it is very likely that a buy signal from the stock oscillator has also occurred. breadth “shares only”. Should this cumulative total criterion of +800 or more be met, then:
Buy 1 SPY for July (22North Dakota) at-the-money call
And sells 1 SPY July (22North Dakota) calls with a striking price 15 points higher
This signal would stop if the amplitude oscillators reversed to become sell signals, and we will keep you updated on its status each week.
follow up action
All stops are mental shutdown stops unless otherwise noted.
We are going to implement a “standard” rolling procedure for our SPY spreads: in any vertical up or down spread, if the underlying hits the short strike price, then roll the entire spread. that would be roll up in the case of a bull spread call, or roll down in the case of a bear put spread. Stay on the same expiration and keep the same distance between punches unless otherwise noted.
Long 2 SPY July (15the) 366 puts and shorts 2 SPY July (15the) 346 puts: We originally bought this spread in line with the VIX trend sell signal. He was rolled down twice. We will stop this position if the VIX falls below its 200-day moving average, which is currently just below 24.
Long 1 SPY July (1St.) 417 calls and shorts 1 SPY July (1St.) 432 calls: This spread was originally bought on May 26, based on the combination of new stock-only put-call ratio buy signals and breadth buy signals. Then it rolled on June 2, when SPY SPY,
traded at strike high in the spread. Half of the position was sold when the amplitude oscillators pulled back to give sell signals. We will close the other half when equity-only put-call ratios become a clear sell signal.
Long 5 KOD July (15the) 10 calls: We will hold on without stopping, initially.
Long 2 SPY July (15the) 366 puts: We initially bought a straddle and then sold the calls when SPX closed below 4070. Remaining put options were reduced last week. Stop if SPY closes above 384.
Long 1 SPY July (22North Dakota) 367 call and short 1 SPY July (22North Dakota) Call 382. This spread was bought in line with the most recent VIX “peak spike” buy signal on June 15. This signal would stop if VIX close above 35.05 on any day.
Long 3 AMLX July (15the) 15 calls: Raise the closing stop at 12.50.
Send your questions to: email@example.com.
Lawrence G. McMillan is president of McMillan Analysis, a registered commodity trading and investment 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 bulletin has been carefully compiled from sources believed to be reliable, but its accuracy or completeness is not guaranteed. Officers or directors of McMillan Analysis Corporation, or accounts managed by such persons, may hold positions in the securities recommended in the notice.