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Sunday, June 23, 2024

Opinion: Stocks are trying to break out of a trading range but resistance is too strong

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The stock market, as measured by the S&P 500 Index
has failed to overcome resistance at 4200. That is bearish, and SPX has backed off sharply since the most recent attempt to challenge 4200 occurred late last week.

That attempt was spurred by positive earnings from Meta Platforms

and others. Now the focus has shifted to interest rates and inflation once again, and that is bearish. So, SPX has pulled back and looks like it once again is going to challenge support in the 4050-4070 range.

A breakout in either direction should prove to be meaningful, in that the market should be able to trend for a while if that occurs. In the meantime, investors are forced to wait for the breakout to occur.

The fact that realized volatility has increased somewhat in the past week or so means that the “modified Bollinger Bands” have separated. The McMillan Volatility Band (MVB) buy signal remains in effect and will continue to do so until SPX touches one or the other of the +/-4σ Bands, currently at about 4250 and 4000.

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Equity-only put-call ratios remain on sell signals, as they continue to rise. The weighted ratio’s sell signal is emanating from an overbought condition that was near the levels of the previous strong sell signals of the past year or so. 

Market breadth is once again quite negative. The breadth oscillators have generally been under severe pressure since April 18th or so, with the exception of two extremely positive days last week — the days when SPX rose after the strong tech stock earnings. This has once again caused the breadth oscillator signals to whipsaw. Currently they are on sell signals and are approaching — but have not yet reached — oversold territory. 

New 52-week lows on the NYSE have, for the most part, been running ahead of New 52-week highs. The difference between New Lows and New Highs has been even more negative in terms of NASDAQ and “stocks only” data. Thus, this signal remains negative for now.

The stock market can fall sharply while VIX is in ‘spiking’ mode.

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remains mostly bullish in its outlook for stocks. Yes, VIX has increased a little, but not enough to reach “spiking” mode. That occurs when VIX increases by at least 3.0 points over any three-day or shorter period, measured with closing prices. VIX would reach “spiking” mode today if it closes above 19.08.

The stock market can fall sharply while VIX is in “spiking” mode, but eventually a ”spike peak” buy signal will occur for the stock market. The trend of VIX intermediate-term buy signal remains in place, and VIX would have to rise above its 200-day Moving Average (currently at 23) in order to terminate that buy signal.

The construct of volatility derivatives is also modestly bullish in its outlook for stocks. That is, the term structure of the VIX futures slopes upward out through October. There is a bit of a “bump” in the term structure of the CBOE Volatility Indices, since the nine-day Index (VIX9D) is modestly elevated in front of tomorrow’s Unemployment Report.

Overall, we are not holding a “core” position at this time because SPX is essentially in a trading range. We are taking positions based on individual signals from our internal indicators.

New Recommendation: Borg-Warner (BWA)

There is a new weighted put-call ratio sell signal in BWA
Moreover, the stock reported an earnings miss this morning and has fallen below what had previously been solid support at 46.

Buy 4 BWA June (16th) 42.5 puts

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In line with the market.

BWA: 42.81 June (16th) 42.5 put: 1.50 bid, offered at 1.85

We will continue to hold these puts as long as the weighted put-call ratio is on a sell signal.

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 1 SPY May (19th) 410 call and Short 1 SPY May (19th) 425 call: This SPY

position was bought in line with the MVB buy signal. It was rolled up 15 points on each side, when SPY traded at 410 on April 3rd. Then it was rolled out last week. The target here is for SPX to trade at its +4σ Band, which is at roughly 4250. The position would be stopped out if SPX closes below the -4σ Band, which is currently near 4000.

Long 3 ARNC May (19th) 27 calls: ARNC

received an all-cash takeover bid at $30 per share. The stock is trading near 29. Sell the calls now to close the position. 

Long 3 CARR June (16th) 42.5 puts:  We will hold these CARR

puts until the put-call ratio rolls over and begins to decline — i.e., as long as the sell signal is in place on the put-call ratio chart.

Long 4 NDAQ Jun (16th) 55 calls: We will hold NDAQ calls

as along as the weighted put-call ratio is on a buy signal. It is still clinging to that buy signal currently.

Long 400 JFIN: The stop for JFIN

remains at 3.50.

Long 1 SPY June (16th) 409 put and Short 1 SPY June (16th) 379: This SPY position was based on the sell signals from the equity-only put-call ratios that occurred in late April. We will hold this position until the equity-only put-call ratios roll over and begin to decline. 

Long 1 SPY June (16th) 409 put and Short 1 SPY June (16th) 379: This position was based on the sell signal from realized volatility, since the 20-day Historical Volatility (HV20) of SPX has risen back above 10%. This position will be stopped out if HV20 falls back to 9% or lower; it currently is at 12%.

All stops are mental closing stops unless otherwise noted.

Send questions to: lmcmillan@optionstrategist.com.

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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