Sage Investment Club

The stock market, as measured by the S&P 500 Index
has fallen below the 4100 level. That is significant because there previously was triple resistance at that level, and when SPX broke out above that level in late January, it seemed as if the next leg of the “new” bull market was underway. Yet SPX has not only fallen below that supposed support level, it’s confirmed the pullback by trading all the way down to 4000. It appears that breakout above 4100 was a false one. Those are dangerous in bear markets (we last saw one in January 2022). 
So, now there is resistance at 4200 (the early February highs), and while there might be some small support levels just below current levels, the major support is at 3900, and then 3760-3850. If SPX falls below 3760 (the December low) that would be an extremely negative development.

The McMillan Volatility Band (MVB) sell signal that was issued in early February remains in place. Its target is the -4σ “modified Bollinger Band” which is currently at about 3920, but is falling. Equity-only put-call ratios are beginning to weaken as well. The weighted ratio is now on a sell signal, according to our computer analysis programs (as well as the naked eye). This sell signal is emanating from a very low (i.e., overbought) level, and the last two from this level were sell signals in April and August of 2022 — both strong sell signals. Meanwhile, the standard ratio has also curled upward, but our computer analysis programs are not yet “saying” that this is a sell signal. This latest rise has a question mark on the accompanying chart.

Market breadth, which had been a stalwart of the bullish indicator on the way up in December and January, has weakened considerably. Both breadth oscillators generated confirmed sell signals as of February 17th. The decline since then has been swift, and breadth has been very negative, including one 90% down day. That means that the breadth oscillators have already reached oversold status. Still, the market can decline while these oscillators are oversold, so “oversold does not mean buy.”  We need to wait for a confirmed buy signal here before acting. Another indicator that has been bullish for quite some time is “New 52-week Highs vs. New 52-week Lows.” This buy signal is in jeopardy of being stopped out, although even if that happens, a new sell signal is not necessarily in place. On Feb. 22, for the first time this year, New Lows outnumbered New Highs on the NYSE. If that happens again, this indicator’s buy signal would be stopped out, and the indicator would return to neutral status. A sell signal requires that New Lows outnumber New Highs for two consecutive days, and that the number of New Lows is greater than 100 on each of those two days. The volatility complex indicators are weakening but have not turned bearish yet. First, VIX
has returned to “spiking” mode — meaning that it has risen more than 3.0 points over a three-day (or shorter) time frame. That is an oversold condition, and SPX can drop sharply while VIX is in “spiking” mode. Eventually, though, a VIX “spike peak” buy signal will be generated. As one can see from the accompanying VIX chart, recent “spike peak” buy signals have not worked out all that well – save for the strong buy signal near the October lows. A blue “B” on the chart is a losing system trade, while a red “B” is a winning one. Regardless, we will act on the new buy signal when it appears.

The trend of VIX remains bullish for stocks as long as both VIX and its 20-day moving average are below the 200-day MA. You can see that the 200-day MA is just below 25 and dropping. VIX is still well below that point. The construct of volatility derivatives remains modestly bullish for stocks, in that the term structures of the VIX futures and of the CBOE Volatility Indices continue to slope upward. We are closely watching the relationship between the two VIX futures front months — March and April. Should March VIX futures begin to trade at prices higher than April VIX futures, that would be extremely negative. So far, that hasn’t happened, but the difference between the two has narrowed. In summary, the breakdown this week, coupled with sell signals from the equity-only put-call ratios means that you should again establish a “core” bearish position. Then, signals from other indicators can be traded alongside that. New Recommendation: “Core” bearish position As noted above, we want to establish and hold a new “core” bearish position: Buy 2 SPY
April (21st) puts with a striking price 10 points out-of-the-money And Sell 1 SPY April (21st) puts with a striking price 30 points lower. So, as an example, if SPY is trading at 400, you would buy the SPY April (21st) 390 puts and sell the SPY April (21st) 360 puts. Initially, we will set a stop to close out this position if SPX closes above 4200. New recommendation: Potential VIX “spike peak” buy signal As noted above, VIX has returned to “spiking” mode. The highest price that it has reached while in “spiking” mode has been 23.63 (so far). IF VIX closes at least 3.0 points below the highest price that it has reached from February 22nd going forward, (currently 23.63), THEN Buy 1 SPY April (7th) at-the-money call And Sell 1 SPY April (7th) call with a striking price 15 points higher. Today, VIX is under 22, so it is possible that this buy signal could be completed as soon as the close of trading today. (it needs to fall below 20.63 at today’s close). 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 0 SPY Feb (24th) 412 call and Short 0 SPY Feb (24th) 426 call:  This spread was bought when the breakout over 3940 by SPX was confirmed, at the close on January 12th. It was rolled up on February 1st, when SPY traded at 412. Then it was stopped out when $SPX closed below 4060 on Feb 21st.  Long 1 SPY Mar (17th) 410 call and Short 1 SPY Mar (17th) 425 call: This spread was bought in line with the “New Highs vs. New Lows” buy signals. It was rolled up on January 26th, when SPY traded at 404, and then it was rolled up again at expiration. Stop yourself out of this position if New Lows on the NYSE exceed New Highs for two consecutive days. Long 0 SPY Mar (17th) 415 call and Short 0 SPY Mar (17th) 431 call: This trade was stopped out on February 21st, when $SPX closed below 4020.  Long 3 XM Mar (17th) 15 calls: Continue to hold XM
while takeover rumors play out. Long 1 SPY Mar (17th) 410 put and Short 1 SPY Mar (17th) 385 put: This bear spread was bought in line with the McMillan Volatility Band (MVB) sell signal. This trade would be stopped out if SPX were to close back above the +4σ Band. We will keep you updated regarding the position of the MVB each week. Long 2 CTLT Mar (17th) 70 calls: This takeover rumor is still “in play,” although CTLT
stock has fallen slightly. Continue to hold while these rumors play out. Long 3 MANU
Mar (17th) 25 calls: Hold without a stop while the takeover rumors play out. Long 2 GRMN April (21st) 95 puts: These were bought on February 21st, when GRMN
closed below 95. The next day, the company reported better-than-expected earnings, and shares jumped higher. We will remain in this position as long as the GRMN weighted put-call ratio remains on a sell signal. All stops are mental closing stops unless otherwise noted. Send questions to: 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. ©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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