The stock market, as measured by the S&P 500 Index
SPX,
has rallied to the top of its downtrend. On the accompanying SPX chart, one can see the red lines defining the lower highs and lower lows that make up the downtrend in SPX. SPX has rallied to nearly the upper red line, which is now at about 4400. A breakout above there would be positive.
Furthermore, the circle on the chart shows the gap that was left in September. If that gap is closed, it would be another positive for SPX. The gap would be filled if SPX trades at 4401.60 or higher.
Finally, there is resistance in the current area from the October highs. So, all three of these are obstacles for the market. If SPX can break out over 4400, it would have overcome all of these obstacles, and that would be very bullish for stocks. However, if SPX turns lower again, it will likely trade to at least 4200 and perhaps below that fairly quickly.
The McMillan Volatility Band (MVB) buy signal (green “B” on the SPX chart) is still in place. Its target is the +4σ Band, which is currently at 4445 and moving sideways.
Equity-only put-call ratios continue to be split. The standard ratio is on a buy signal, but the weighted ratio, despite having rolled over a bit this week, is still rated as being on a sell signal by the computer programs we use to analyze these charts.
You might think that we should just go ahead and call the weighted ratio a “buy” since it peaked a few days ago. However, look at the accompanying weighted ratio’s chart, where there are two green circles. The last time this chart behaved in a similar manner was just a couple of months ago, and eventually the sell signal was forcefully reinstated as the weighted ratio rose and the stock market fell sharply.
At that time, the computer analysis also suggested that a buy signal was not yet in place, just as it’s doing now. So, we will wait for the confirmed signal before saying that the weighted ratio has rolled over to a buy signal.
Breadth was strong when the market rallied last week from the bottom of its downtrend channel to the top. Yet in the past three days, despite some further modest gains by SPX, breadth has been negative every day, and now the breadth oscillators are back on sell signals. This is not only disappointing for the bulls, it strongly calls into question the strength of this rally.
New Highs and New Lows on the NYSE have been numbering less than 100 each day, so this indicator remains in a neutral state. The previous sell signal was a strong one, but it was stopped out on November 3rd.
VIX
VIX
VX00,
has plunged back below 15. That keeps the recent VIX “spike peak” buy signal in place, and it has stopped out the recent trend of VIX sell signal. There is no trend of VIX signal in place at the moment, since VIX is below the 200-day Moving Average, while the 20-day MA of VIX is above the 200-day.
The construct of volatility derivatives has returned to a bullish state, as far as its outlook for the stock market is concerned. The term structures of both the VIX futures and of the CBOE Volatility Indices slope upward, and the VIX futures are trading at relatively large premiums to VIX.
In summary, we are maintaining a “core” bearish position until SPX proves that it can break out over 4400 and hold that breakout. Meanwhile, we will trade other confirmed signals as they occur.
New recommendation: A neutral approach
With SPX poised near 4400, there is large upside potential if it can break out over that level. However, a failure here could easily see slide all the way back to the bottom of the downtrend range — in the 4100-4200 area.
This suggests that a straddle buy might be a feasible strategy at this time. It would see that the market is ready to move one way or the other from here, and that it is not likely to just sit near the 4400 level. In addition, VIX is at a low level right now, so that is a benefit to this strategy as well, as there is not a lot of implied volatility built into the price of the straddle.
Buy 1 SPY
SPY
Dec (8th) at-the-money call and Buy 1 SPY Dec (8th) put with the same strike. That is, we are buying 1 SPY Dec (8th) at-the-money straddle.
We are going to use a “money” stop here. The straddle costs about 12.75, so if it has lost 50% of its original value at any day’s close, stop out the position.
New Recommendation: AvePoint Corp. (AVPT)
AvePoint
AVPT,
AVPT,
has recently staged a second upside breakout after a consolidation. This is accompanied by strong stock and option volume.
Buy 5 AVPT Dec (15th) 7 calls in line with the market.
AVPT: 7.68 AVPT Dec (15th) 7 call: 0.85 bid, offered at 1.05
Stop out if AVPT closes below 6.75.
Market insight: Recap of the October seasonal trade
The four-day period which began with the close of trading on October 27th and ended with the close of trading on November 2nd produced a record-setting gain of 200.41 SPX points. That was the largest point gain on record for this seasonal trading pattern. The track record now shows 32 wins and 6 losses (and 8 “no-trades”) in the past 46 years. A “no-trade” occurs in certain years when there has not been at least a 3.2% decline by SPX sometime in October prior to October 27th.
It was a gain of 4.9%, which is not the record. The percent gain record was set in 2008, when SPX gained 13.8%, or 115 points during this 4-day seasonal period.
In both cases, and many others, the market is oversold when the seasonal period begins, which certainly helps things along on the bullish side.
This successful seasonal trade follows the mid-September seasonal trade (sell the market in the week after September “expiration”), which was also profitable. There are many other seasonal trades that will be coming up after Thanksgiving and continuing through January, so we look forward to those.
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 1 expiring SPY Nov (10th) 412 put: Bought in line with the equity-only put-call ratio sell signals. It was rolled down several times, prior to the most recent market rally. Since this sell signal is still in place for now, roll to the Dec (15th) 420 put. Continue to roll down every time the put becomes 8 points ITM. In essence, this is our “core” bearish position.
Long 2 EQR
EQR,
Nov (17th) 52.5 puts: We will continue to hold as long as the weighted put-call ratio for EQR remains on a sell signal.
Long 0 SPY Nov (10th) 412 put: Established in line with the “New Highs vs. New Lows” sell signal. It was stopped out on November 3rd, after New Highs outnumbered New Lows on the NYSE for two consecutive days.
Long 3 XLE
XLE
Nov (17th) 86 puts: We will hold as long as the weighted put-call ratio of XLE remains on a sell signal. If XLE trades at 80, roll down to the Dec (8th) 80 puts.
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 if the long side becomes at least 8 points in-the-money: if that happens, sell this spread and buy an equal number of the SPY Dec (1st) 442 calls. We would not be rolling to spread in this case.
Long 3 ES
ES,
Nov (17th) 60 calls: We will hold this position as long as the weighted put-call ratio chart for ES remains on a buy signal.
Long 0 SPY Nov (10th) 418 call: We originally bought two calls in line with the October seasonal trade. The position was closed on November 2nd. This turned out to be a strong seasonal buy signal this year — the largest SPX gain on record for this system, more than 200 points.
Long 4 XLP
XLP
Dec (1st) 68 calls: These calls were finally bought on Nov 2nd, when XLP closed above 68.04, after a couple of weeks of trying. Stop out on a close below 67 by XLP.
Long 1 SPY Dec (15th) 428 call and short 1 SPY Dec (15th) 443 call: This position was bought in line with the recent MVB buy signal. We will hold this position until either SPX reaches the +4σ Band or closes below the -4σ Band, whichever comes first. Neither has been attained yet.
All stops are mental closing stops unless otherwise noted.
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 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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