The stock market, as measured by the S&P 500 Index
SPX,
pulled back modestly for about a week, but then found support near 4330. The SPX chart is still bullish, which is why we continue to maintain a core bullish position. There is stronger support at the breakout levels of 4300 and 4200 below that. A close below 4200 would change the picture to bearish.
Earlier in June, SPX had rallied strongly, reaching an overbought state by closing above the +4σ “modified Bollinger Band.” That eventually became a full-fledged McMillan Volatility Band (MVB) sell signal on June 23rd. It is marked as a green “S” on the accompanying SPX chart. The target is the lower, -4σ Band, which is currently at 4200 and rising.
Equity-only put-call ratios remain on buy signals. The ratios have dropped so far that they are the lower edges of their chart. That makes them overbought. But they won’t generate sell signals until they roll over and begin to trend higher.
Breadth has been all over the place, as it continues its rather frustrating pattern that has now lasted for months. Officially, the “stocks only” breadth oscillator is on a buy signal, while the NYSE breadth oscillator is on a sell signal. That perfectly typifies the somewhat random nature of recent breadth signals. We are not taking a position based on either of those signals.
New 52-week highs on the NYSE have continued to outpace New 52-week lows every day. In fact, for the last two days, new highs on the NYSE have numbered more than 100, so this indicator remains on a strong buy signal for now. It would only falter if new lows exceeded new highs on the NYSE for two consecutive trading days.
VIX
VIX,
has seemingly found a comfort zone of sorts near 14. It has been settled in between 13 and 15 for the entire month of June. That keeps the trend of VIX buy signal in place. While one could make arguments that VIX is overbought at current levels, it would not be a problem for stocks until VIX begins to rise sharply. Specifically, the VIX chart will remain bullish for stocks until VIX returns to “spiking” mode — an advance of at least 3 points over any three-day or shorter time period, using closing prices.
The construct of volatility derivatives remains bullish. That is, the term structures of the VIX futures and of the CBOE Volatility Indices continue to slope upwards. Moreover, the VIX futures are trading at a large premium to VIX.
In summary, we continue to hold a core bullish position. We will trade other confirmed signals around that as signals are confirmed.
New recommendation: Carnival Corp. (CCL)
The chart of CCL
CCL,
has been improving lately, with both option- and stock volume patterns improving. This week, the company reported earnings, and that was well-received, so the stock is now breaking out over a consolidation area.
Buy 5 CCL Aug (18th) 17 calls in line with the market.
CCL: 17.30 Aug (18th) 17 call: 1.48 bid, offered at 1.50
Set a trailing, closing stop at 15.20 for these calls.
New recommendation: Prudential Financial (PRU)
There is a new weighted put-call ratio buy signal in PRU
PRU,
We want to wait to see if PRU can overcome resistance at 88 before acting on this signal.
IF PRU closes above 88, buy 2 PRU Aug (18th) 87.5 calls.
PRU: 87.59
If bought, we will hold these calls as long as the weighted put-call ratio for PRU is on a buy signal.
Follow-up action:
We are using a “standard” rolling procedure for our SPY
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 3 AMAM
AMAM,
July (21st) 12.5 calls: Raise the trailing stop to 14.
Long 4 HAL
HAL,
July (21st) 30 calls: The put-call ratio here has rolled over and begun to rise. Thus, it is no longer on a buy signal, so sell these calls now.
Long 800 KOPN
KOPN,
: The stop remains at 1.70.
Long 2 SPY July (7th) 439 calls: Bought on the upside breakout. This is our core bullish position. Stop out of this trade if SPX closes below 4200. The position was rolled up once. Roll up every time your long SPY option is at least 6 points in-the-money. Since expiration is nearing, we want to roll out to the July (21st) 439 calls.
Long 1 SPY July (7th) 439 call: Bought in line with the “New Highs vs. New Lows” buy signal. Stop yourself out of this trade if, on the NYSE, new lows outnumber new highs for two consecutive days. The position was rolled up once. Roll up every time your long SPY option is at least 6 points in-the-money. Since expiration is nearing, we want to roll out to the July (21st) 439 calls.
Long 2 PFG
PFG,
July (21st) 70 calls: Hold these calls as long as the weighted put-call ratio remains on a buy signal.
Long 1 SPY Aug (18th) 434 put and Short 1 SPY Aug (18th) 404 put: This position was established in line with the MVB sell signal of June 23rd, when SPX closed below 4151. We will hold it until SPX trades at the -4σ Band (the profit “target”) or trades above the +4σ Band, which would stop out the trade.
Long 10 VTRS
VTRS,
August (18th) 10 calls: We will hold this position as long as the weighted put-call ratio for VTRS is on a buy signal.
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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