The S&P 500 SPX index,
finally broke through the major resistance at 4100. If the break holds today then it will be valid. Additionally, SPX is now clearly above its declining 200-day moving average, and it has been above the downtrend line that has defined the US bear market for over a year.
This breakout has several ramifications, the most important of which is that it could be a signal that the bear market is over. This is not a guarantee, of course, as most bear markets have a significant rally, designed to fool both bulls and bears. Regardless, we will follow this uptrend as long as it persists – and, more importantly, as long as our indicators remain bullish.
There should now be support at 4100 and 4020 below. The next major hurdle on the upside would be resistance at 4200 and the gap close on the SPX chart at 4218 (from last August).
SPX is already approaching the “modified Bollinger Band” of +4σ. It hit that tape yesterday. If SPX closes above this band, a McMillan Volatility Band (MVB) sell signal could be established, but this is not a guarantee. So, as of now, there is no ongoing MVB sell signal setup, but there could be one in the days and possibly weeks to come.
Stock-only buy and sell ratios continue to fall from their highs in early January, when buy signals emanated from extremely oversold levels. These buy signals are still in place (and there was one from the total put-call ratio as well). The ratios will continue to be bullish for stocks as long as they continue to fall.
Market breadth was one of our strongest internal indicators. It continues to be quite spectacular. As a result, both of our width oscillators are on buy signals and are deep in overbought territory.
When SPX breaks out on a new bull market leg, it is desirable for these oscillators to be overbought, as this means the rally is wide and expanding. These oscillators could sustain two and probably three days of negative magnitude and still remain on current buy signals. There was a “90% volume up day” on the NYSE on January 31, but otherwise there were no other 90% days.
The number of new 52-week highs on the NYSE continues to grow (they hit 177 on Feb. 1), so this indicator remains bullish. This buy signal will be in effect until the new lows exceed the new highs for two consecutive days. It seems highly unlikely to happen anytime soon, as the number of new lows has been consistently in the signal numbers for a few weeks now.
continues to be in a downtrend (which is bullish for stocks), and the various indicators we have that imply volatility are all generating bullish signals for the stock market right now. This downward trend in VIX would only be interrupted if VIX closed above its 200-day moving average – which is unlikely to happen soon, since this moving average is at 25.50 and going sideways. The construction of volatility derivatives is also positive, as the term structure of VIX futures contracts is upward sloping, as is the term structure of CBOE volatility indices – for the most part.
There are a few small flies in the ointment. The first is that the CBOE 9-Day Volatility Index (VIX9D) is still trading above VIX as traders expect a possible volatile reaction to next week’s CPI report. Also, VIX is at very low levels, approaching 17. In VIX’s long history, it’s not that low, but over the past two years, it is. When VIX goes “too low” it’s an overbought condition, which is not a problem unless VIX suddenly jumps back into “spike” mode.
January’s seasonal bull run is over and although it got off to a bad start, it has returned to profitability. This is the end of seasonal trading for a while, as the ones we track usually take place from October to January.
All in all, there is no more reason to hold a “basic” bearish stance now that SPX has broken out higher. We may revisit this position later, but for now we are trading the buy signals that have been generated by our various indicators.
New Recommendation: Small Group Trading on the Rise
If SPX can hold the break above 4100, we want to add a bullish position to our portfolio:
IF SPX closes above 4120 on any day,
THEN Buy 1 SPY Mar (17e) call for parity and sale 1 SPY Mar (17e) call with a 16 point higher striking price.
Stop on a close below 4020 by SPX.
New Recommendation: Qualtrics Int’l (XM)
Volume of options in Qualtrics International XM,
rose significantly on February 1 after 15% shareholder Silver Lake revealed it planned to bid for the company. Analysts estimate the takeover price to be around $20. The inventory volume models are very strong. There is support at 3:50 p.m.
Buy 3 March XM (17e) 15 calls at a price of 2.50 or less.
XM: 16.76 March (17e) 15 calls: 2,250 bid, offered at 2.50
All stops are mental closing stops unless otherwise stated.
We use a “standard” rolling procedure for our SPY SPY,
spreads: in any bullish or bearish vertical spread, if the underlying reaches the short strike, then roll the whole spread. This would be a roll up in the case of a call bull spread, or a roll down in the case of a bear put spread. Stay in the same exhale and keep the same distance between strikes unless instructed otherwise.
Long 0 SPY Feb (17e) 375 puts and Short 0 SPY Feb (17e) 355 put options: This was our “basic” bearish position. | It was halted on Feb. 1 when SPX closed above 4100.
Long 2 PCAR February (17e) 97.20 met: The put-call ratio reversed after a strong earnings report from PCAR PCAR,
Options are essentially worthless, so we’ll hold them to see if the stock can pull off of them.
Long 1 CLC February (17e) Call 180: This stock has suffered violent price movements after declaring a new share buyback program last week and in doing so has received severe criticism from the government. Sell CVX CVX,
calls now, since the put-call ratio has become higher.
Long Calls 2 OSH (February 17) 30: Keep holding OSH OSH,
non-stop as long as the takeover rumors are in place.
Long 1 SPY Feb (24e) Call 412 and Short 1 SPY Feb (24e) call 427: This spread was bought when the breakout of 3940 by SPX was confirmed, at the close on January 12e. It was rolled up on February 1, when SPY traded at 412.
Long 1 SPY Feb (17e) Call 404 and Short 1 SPY Feb (17e) Call 419: This gap was bought in line with the “new highs versus new lows” buy signals. It was rolled up on January 26 when SPY traded at 404. Stop on this position if new lows on the NYSE cross new highs for two consecutive days.
Long 4 NATI Feb (17e) 55 calls: Hold NATI NATI,
without stopping at the start, to see if an escalation develops.
Long 2 SPY Feb (10e) 406 calls and Short 2 SPY Feb (10e) 420 calls: This gap was bought in line with January’s bullish seasonal trade. There was no 421 strike, so we used 420 instead. The seasonal bullish period expires today (Thursday, February 2), so exit your position at the end of trading today.
We didn’t buy the USO calls, from USE USE,
never closed above 72. We are rescinding this recommendation now.
Send your questions to: email@example.com.
Lawrence G. McMillan is President of McMillan Analysis, a registered commodity trading and investment adviser. 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 bestselling book, Options as a strategic investment. www.optionstrategist.com
Disclaimer: ©McMillan Analysis Corporation is registered with the SEC as an investment adviser and with the CFTC as a commodity trading adviser. The information in this newsletter has been carefully compiled from sources believed to be reliable, but its accuracy and completeness are not guaranteed. Officers or directors of McMillan Analysis Corporation, or accounts managed by such persons, may hold positions in the securities recommended in the advisory.
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