Stock benchmark needs to hold 4330 as market internals deteriorate.
The stock market, as measured by the S&P 500 Index , peaked near 4600 in late July and has been in a downtrend ever since. Last week, the pullback had its first test of a major support area, at 4330, and that support held quite nicely. So, by that measure, the bull market is still intact on the SPX chart. There is another support area at 4200, but it’s the one at 4330 that needs to hold in order to keep us in a “core” bullish position.
There were several oversold conditions, so this current rally might just be an oversold rally. Those usually carry up to and perhaps slightly above the declining 20-day Moving Average before they fail. With the strong earnings of NVIDIA NVDA on Wednesday, SPX will likely exceed its declining 20-day Moving Average on Thursday.
This recent pullback saw SPX trade below its -4σ “modified Bollinger Band” (mBB). That successfully completed the McMillan Volatility Band (MVB) sell signal of late July (red “S” on the SPX chart). Not only that, but by moving below the -4σ Band now, a potential new MVB buy signal could set up. Yesterday’s action in SPX saw a “classic” mBB buy signal occur. We don’t trade those, though, because there have been too many whipsaws from them in the past. Rather, we wait for further confirmation in the form of follow-through that creates the MVB buy signal. That could come as soon as today.
Equity-only put-call ratios continue to move higher. Thus, they remain on sell signals and will continue to do so until they roll over and begin to decline. Even when the market rallies, it seems that there is a good deal of put buying, which keeps these ratios moving higher.
Breadth has been very poor throughout most of August, and so the breadth oscillators have remained on sell signals. They have reached deeply oversold conditions, but it would take at least two days of positive breadth to pull them out of this condition and over onto a buy signal. That has not taken place yet.
New 52-week Lows on the NYSE have outnumbered New Highs for the past eight trading days. That stopped out the long-standing buy signal from this indicator, but the indicator is now neutral. It would take New Lows registering more than 100 issues for two consecutive days in order to generate a sell signal. So, despite the recent increase in New Lows, it has not been enough to create a sell signal.
The above indicators are what we call “market internals,” and they have been fairly negative in line with the decline in SPX. Volatility measures, on the other hand, have more or less remained subdued and thus bullish in their outlook for stocks. The VIX VX00 “spike peak” buy signal that was generated a couple of weeks ago remains in place (green “B” on the accompanying VIX chart). In addition, the intermediate-term trend of VIX buy signal remains in place as well. That signal would be stopped out if VIX were to close above its declining 200-day Moving Average, which it briefly touched this week. The 200-day MA is at 18.70 and declining.
Finally, the construct of volatility derivatives remains bullish since the term structures of the VIX futures and of the CBOE Volatility Indices continue to slope upwards. Moreover, the VIX futures are trading at relatively large premiums to VIX.
So, we are maintaining a low-delta “core” bullish position as long as SPX is above 4330, and we will trade other indicators around that.
New Recommendation: Potential MVB buy signal
SPX has moved above its -3σ Band and thus created a “classic” modified Bollinger Band buy signal. However, for a McMillan Volatiltiy Band (MVB) buy signal to occur, SPX will have to trade at 4459 or higher.
IF SPX trades at 4459 at any time, then buy 1 SPY Oct (20th) at-the-money call
And sell 1 SPY Oct (20th) call with a striking price 18 points higher.
We are using a bull spread because these October options are somewhat expensive. This signal will remain in place unless SPX closes below its -4σ Band, which would stop out the signal. The target for the trade is for SPX to touch the +4σ Band.
New Recommendation: Archer-Daniels-Midland (ADM)
A recent weighted put-call ratio sell signal has been generated for ADM ADM. The stock has fallen below support, so we are going to trade this signal.
Buy 3 ADM Oct (20th) 82.5 puts in line with the market.
ADM: 81.16 Oct (20th) 82.5 put: 3.00 bid, offered at 3.20
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 KOPN KOPN : The 800-share stock position was stopped out on August 11th.
Long 2 SPY Sept (15th) 456 calls: This is our “core” bullish position. The calls have been rolled several times. Roll up every time your long SPY option is at least 6 points in-the-money.
Long 10 VTRS VTRS Sept (15th) 10 calls: Roll up and out to the VTRS Sept (15th) 11 calls. The stop remains at 10.75.
Long 8 CRON CRON Sept (15th) 2 calls: Hold these calls without a stop while the takeover rumors play out.
Long 6 ORIC ORIC Sept (15th) 7.5 calls: The stock is strong; it made a new yearly high on Wednesday. The stop remains at 8.10.
Long 2 EW EW Sept (15th) 77.5 puts: Continue to hold these puts as long as the weighted put-call ratio remains on a sell signal.
Long 4 SPY Sept (29th) 480 calls: This is the position taken in line with the CVB buy signal. We are holding SPY calls with a striking price equal to SPY’s all-time high. We will hold without a stop initially.
Long 5 EEM Oct (20th) 41 calls: Sell these calls since the EEM weighted put-call ratio is no longer on a buy signal.
Long 1 SPY Sept (15th) 448 put and Short 1 SPY Sept (15th) 418 put: Bought in line with the equity-only put-call ratio sell signals. Stop out of this trade if either equity-only put-call ratio moves to a new buy signal.
Long 2 NTAP NTAP Oct (20th) 80 puts: Hold this position as long as the weighted put-call ratio for NTAP remains on a sell signal.
Long 2 EQR EQR Oct (20th) 65 puts: These were bought on the close of Aug 15th, when EQR closed below 64.50. We will continue to hold as long as the weighted put-call ratio for EQR remains on a sell signal.
Long 3 X X Sept (15th) 31 calls: Hold while the takeover rumors play out.
Long 2 PSX PSX Sept (15th) 115 calls: Hold while the activist investor rumors play out.