The declining 200-day moving average of the benchmark index happened to be close to 4,300, and the combination of the two not only put an end to that rally but seems to have kicked off a leg down in stock prices.
Several support areas have been broken. There is an island formation on the SPX chart formed by a gap up on Aug. 10 and then a gap down on Aug. 22.
That is a very negative technical formation, and it is rare to see it in an Index. I recall a similar one in the Dow Jones Industrial Average
DJIA,
-1.07%
in March 1974 that set off the next leg of that bear market, and it’s possible this one is doing the same.
This past week, selling broke through support at 4,070, so the next support level is just above 3,900. The selling has been intense enough that SPX traded down to its –4σ “modified Bollinger Band” (mBB) this week, and that terminates the McMillan Volatility Band (MVB) sell signal that had occurred just about two weeks ago.
However, the market would have to move lower — closing below that –4σ Band — in order to set up a new MVB buy signal.
Equity-only put-call ratios are finally both in agreement and on sell signals. The weighted ratio started moving higher — thus generating a sell signal — about 10 days ago. The standard ratio was reluctant to follow, and has only confirmed its sell signal in the past few days. As long as both ratios are rising, that is bearish for the stock market.
Breadth has been poor, and the breadth oscillator sell signals that were generated on Aug. 19 are still in place. However, both breadth oscillators are now deeply into oversold territory — meaning that a buy signal lies in the future, but of course it’s too early to say where or when. “Oversold does not mean buy” is one of our strongest mottos, and it merely means that an oversold market can continue to decline more than one might expect.
New 52-week highs are almost nonexistent once again (11 on the NYSE yesterday), and so this indicator remains on a sell signal as it has since last April. It never did give a buy signal this summer, as many other indicators were doing.
VIX
VIX,
-0.35%
has jumped higher this week, and that has had some repercussions among our volatility indicators. First, a VIX “spike peak” buy signal was given as of the close of trading on Aug. 25 and was immediately stopped out by a large rise in VIX on Aug. 26. VIX remains in “spiking mode” at this time, so a new VIX “spike peak” buy signal will set up in the near future.
The second byproduct of this recent rise in VIX is that the intermediate-term trend of VIX buy signal that had taken place when both VIX and its 20-day moving average crossed below its 200-day MA back in early August, is now canceled because VIX is back above the 200-day MA. This is not a sell signal, though, for that would also require the 20-day MA to cross back above the 200-day MA, which is not imminent. Still, the buy signal has been canceled for now.
If VIX were to fall back below its 200-day MA, the trend buy signal would be reinstated. By coincidence, the level at which both of these VIX buy signals would take place would be a VIX close below 24.60.
The construct of volatility derivatives remains rather stubbornly in a modestly positive state for stocks. That is, the term structure of the VIX futures slopes upward out through January and then is flat after that.
In summary, we continue to hold a “core” bearish position, in line with the downtrend that is obvious on the SPX chart. Around that, individual indicator signals can be traded. The market is oversold right now, so roll down profitable spreads or exit where called for (MVB sell signal, for example), but don’t go long just because the market is oversold.
New recommendation: Potential VIX buy signals
As noted above, VIX is in “spiking” mode once again. A VIX “spike peak” buy signal that occurred last week was stopped out for a small loss in just one day. Now another one is setting up. So far this week, the high price for VIX has been 27.69. A close by VIX of at least 3 points below its most recent high price would generate a new VIX “spike peak” buy signal. In addition, if VIX closes back below its rising 200-day moving average, that would once again confirm that the trend of VIX is downward, and that is bullish for stocks. So, let’s use a two-tiered approach to enter these positions:
Step 1:
IF VIX closes at least 3.00 points below the highest price that is has reached from Aug. 29 going forward,
THEN Buy 1 SPY Oct (7th) at-the-money call
And Sell 1 SPY Oct (7th) call with a striking price 15 points higher.
Step 2:
In addition, if VIX closes below 24.50 that would reinstate the trend of VIX buy signal, so buy another SPY spread with the same parameters as stated in step 1 above.
New recommendation: Brown-Forman
The option symbol for Brown-Forman Corp.
BF.B,
-0.94%
is BFB. Call buying has been especially heavy this summer, forcing its put-call ratio down to an extremely optimistic (overbought) state. One can see how much lower it is now, where it is generating a new sell signal, than it has been in the past year.
Buy 2 BFB Oct (21st) 75 puts
At a price of 4.50 or less
BF.B: 72.08 Oct (21st) 75 put: offered at 5.20
Follow-up action
All stops are mental closing stops unless otherwise noted.
We are going to implement 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 10 CRNT Sept (16th) 2.5 calls: Aviat Networks (AVNW) has bid a price of essentially $3.08 for CRNT, but CRNT is not interested in selling. We rolled to September last week. Continue to hold.
Long 0 AAPL Sep (16th) 170 calls: were stopped out when AAPL closed below 166 on Aug. 26. Overall, this was a nicely profitable trade, since we had rolled up twice previously.
Long 1 SPY Sept (16th) 426 call and Short 1 SPY Sept (16th) 439 calls: spreads were originally bought on July 21, when several indicators generated buy signals. Then they were rolled up and eventually out. Sell the spread now, since the equity-only put-call ratios rolled back to sell signals.
Long 3 MRO Oct (21st) 24 calls: we will hold this position as long as the put-call ratio for MRO remains on a buy signal.
Long 0 SPY Sept (16th) 414 call and short 0 SPY Sept (16th) 429 call: was bought in line with VIX beginning to trend down on Aug. 4. It was stopped out on Aug. 29 when VIX had closed above 24.60 for two consecutive days, .
Long 2 OIH Sept (16th) 230 calls and short 2 OIH Sept (16th) 250 calls: sell this spread now since the weighted put-call ratio for OIH has rolled back to a sell signal.
Long 3 SGFY Sept (16th) 22.5 calls: we are holding without a stop, in order to see if anyone does submit a bid for SGFY. There is still no bid, but there are supposedly several parties interested in acquiring SGFY, with the highest bid rumored to be around $30.
Long 1 SPY Oct (21st) 396 put and Short 1 SPY Oct (21st) 366 put: this is our “core” bearish position. It was rolled down 30 points on each strike, since SPY traded at 396 this week (per our general rule of “rolling” stated above). There is no longer a stop for this position at this time.
Long 2 SGEN Sept (16th) 170 calls and Short 2 SGEN Sept (16th) 185 calls: this spread was bought after rumors of a takeover by MRK were spreading. Hold these spreads without a stop.
Long 0 SPY Oct (7th) 413 calls and Short 0 SPY Oct (7th) 428 calls: this spread was bought in line with the $VIX spike peak buy signal of August 24th, but was stopped out the name day, when $VIX returned to “spiking” mode – where it still is today. See commentary in the newsletter above regarding taking a new position based on the next “spike peak” buy signal.
Long 6 CANO Oct (21st) 7 calls: stop yourself out on a close below 5.50.
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.
Disclaimer: ©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.
Source: https://www.marketwatch.com/story/the-stock-market-is-unrelentingly-bearish-but-still-nowhere-close-to-triggering-a-buy-signal-11662062876?siteid=yhoof2&yptr=yahoo
Opinion: The stock market is unrelentingly bearish but still nowhere close to triggering a ‘buy’ signal
The S&P 500 Index
-1.07%
SPX,
has been in a bearish phase since the mid-summer rally fizzled out near 4,300 points.
The declining 200-day moving average of the benchmark index happened to be close to 4,300, and the combination of the two not only put an end to that rally but seems to have kicked off a leg down in stock prices.
Several support areas have been broken. There is an island formation on the SPX chart formed by a gap up on Aug. 10 and then a gap down on Aug. 22.
That is a very negative technical formation, and it is rare to see it in an Index. I recall a similar one in the Dow Jones Industrial Average
-1.07%
DJIA,
in March 1974 that set off the next leg of that bear market, and it’s possible this one is doing the same.
This past week, selling broke through support at 4,070, so the next support level is just above 3,900. The selling has been intense enough that SPX traded down to its –4σ “modified Bollinger Band” (mBB) this week, and that terminates the McMillan Volatility Band (MVB) sell signal that had occurred just about two weeks ago.
However, the market would have to move lower — closing below that –4σ Band — in order to set up a new MVB buy signal.
Equity-only put-call ratios are finally both in agreement and on sell signals. The weighted ratio started moving higher — thus generating a sell signal — about 10 days ago. The standard ratio was reluctant to follow, and has only confirmed its sell signal in the past few days. As long as both ratios are rising, that is bearish for the stock market.
Breadth has been poor, and the breadth oscillator sell signals that were generated on Aug. 19 are still in place. However, both breadth oscillators are now deeply into oversold territory — meaning that a buy signal lies in the future, but of course it’s too early to say where or when. “Oversold does not mean buy” is one of our strongest mottos, and it merely means that an oversold market can continue to decline more than one might expect.
New 52-week highs are almost nonexistent once again (11 on the NYSE yesterday), and so this indicator remains on a sell signal as it has since last April. It never did give a buy signal this summer, as many other indicators were doing.
VIX
-0.35%
VIX,
has jumped higher this week, and that has had some repercussions among our volatility indicators. First, a VIX “spike peak” buy signal was given as of the close of trading on Aug. 25 and was immediately stopped out by a large rise in VIX on Aug. 26. VIX remains in “spiking mode” at this time, so a new VIX “spike peak” buy signal will set up in the near future.
The second byproduct of this recent rise in VIX is that the intermediate-term trend of VIX buy signal that had taken place when both VIX and its 20-day moving average crossed below its 200-day MA back in early August, is now canceled because VIX is back above the 200-day MA. This is not a sell signal, though, for that would also require the 20-day MA to cross back above the 200-day MA, which is not imminent. Still, the buy signal has been canceled for now.
If VIX were to fall back below its 200-day MA, the trend buy signal would be reinstated. By coincidence, the level at which both of these VIX buy signals would take place would be a VIX close below 24.60.
The construct of volatility derivatives remains rather stubbornly in a modestly positive state for stocks. That is, the term structure of the VIX futures slopes upward out through January and then is flat after that.
In summary, we continue to hold a “core” bearish position, in line with the downtrend that is obvious on the SPX chart. Around that, individual indicator signals can be traded. The market is oversold right now, so roll down profitable spreads or exit where called for (MVB sell signal, for example), but don’t go long just because the market is oversold.
New recommendation: Potential VIX buy signals
As noted above, VIX is in “spiking” mode once again. A VIX “spike peak” buy signal that occurred last week was stopped out for a small loss in just one day. Now another one is setting up. So far this week, the high price for VIX has been 27.69. A close by VIX of at least 3 points below its most recent high price would generate a new VIX “spike peak” buy signal. In addition, if VIX closes back below its rising 200-day moving average, that would once again confirm that the trend of VIX is downward, and that is bullish for stocks. So, let’s use a two-tiered approach to enter these positions:
Step 1:
IF VIX closes at least 3.00 points below the highest price that is has reached from Aug. 29 going forward,
THEN Buy 1 SPY Oct (7th) at-the-money call
And Sell 1 SPY Oct (7th) call with a striking price 15 points higher.
Step 2:
In addition, if VIX closes below 24.50 that would reinstate the trend of VIX buy signal, so buy another SPY spread with the same parameters as stated in step 1 above.
New recommendation: Brown-Forman
The option symbol for Brown-Forman Corp.
-0.94%
BF.B,
is BFB. Call buying has been especially heavy this summer, forcing its put-call ratio down to an extremely optimistic (overbought) state. One can see how much lower it is now, where it is generating a new sell signal, than it has been in the past year.
Buy 2 BFB Oct (21st) 75 puts
At a price of 4.50 or less
BF.B: 72.08 Oct (21st) 75 put: offered at 5.20
Follow-up action
All stops are mental closing stops unless otherwise noted.
We are going to implement 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 10 CRNT Sept (16th) 2.5 calls: Aviat Networks (AVNW) has bid a price of essentially $3.08 for CRNT, but CRNT is not interested in selling. We rolled to September last week. Continue to hold.
Long 0 AAPL Sep (16th) 170 calls: were stopped out when AAPL closed below 166 on Aug. 26. Overall, this was a nicely profitable trade, since we had rolled up twice previously.
Long 1 SPY Sept (16th) 426 call and Short 1 SPY Sept (16th) 439 calls: spreads were originally bought on July 21, when several indicators generated buy signals. Then they were rolled up and eventually out. Sell the spread now, since the equity-only put-call ratios rolled back to sell signals.
Long 3 MRO Oct (21st) 24 calls: we will hold this position as long as the put-call ratio for MRO remains on a buy signal.
Long 0 SPY Sept (16th) 414 call and short 0 SPY Sept (16th) 429 call: was bought in line with VIX beginning to trend down on Aug. 4. It was stopped out on Aug. 29 when VIX had closed above 24.60 for two consecutive days, .
Long 2 OIH Sept (16th) 230 calls and short 2 OIH Sept (16th) 250 calls: sell this spread now since the weighted put-call ratio for OIH has rolled back to a sell signal.
Long 3 SGFY Sept (16th) 22.5 calls: we are holding without a stop, in order to see if anyone does submit a bid for SGFY. There is still no bid, but there are supposedly several parties interested in acquiring SGFY, with the highest bid rumored to be around $30.
Long 1 SPY Oct (21st) 396 put and Short 1 SPY Oct (21st) 366 put: this is our “core” bearish position. It was rolled down 30 points on each strike, since SPY traded at 396 this week (per our general rule of “rolling” stated above). There is no longer a stop for this position at this time.
Long 2 SGEN Sept (16th) 170 calls and Short 2 SGEN Sept (16th) 185 calls: this spread was bought after rumors of a takeover by MRK were spreading. Hold these spreads without a stop.
Long 0 SPY Oct (7th) 413 calls and Short 0 SPY Oct (7th) 428 calls: this spread was bought in line with the $VIX spike peak buy signal of August 24th, but was stopped out the name day, when $VIX returned to “spiking” mode – where it still is today. See commentary in the newsletter above regarding taking a new position based on the next “spike peak” buy signal.
Long 6 CANO Oct (21st) 7 calls: stop yourself out on a close below 5.50.
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.
Disclaimer: ©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.
Source: https://www.marketwatch.com/story/the-stock-market-is-unrelentingly-bearish-but-still-nowhere-close-to-triggering-a-buy-signal-11662062876?siteid=yhoof2&yptr=yahoo