This past week, the S&P 500 index traded at new intraday and closing lows for 2022, breaking below the February lows. However, a massive rally day quickly followed, based on an extremely oversold condition and the results of the Federal Reserve meeting.
The major focus is that the S&P SPX,
chart is still in a downtrend (blue lines on the accompanying chart), and that is bearish. Within that bearish range, though, the bulls are trying to once again establish support in the general area near 4100.
There was also a strong one-day rally on April 28, followed quickly by a move to new relative lows. Now, we have seen another large rally on Wednesday, and the bulls are hoping for a better fate.
The short-term indicators are in a slightly better place this week, so this oversold rally might be able to last for a few days. Typically, oversold rallies in bear markets run into trouble soon after crossing above their declining 20-day moving average, which is currently at 4340 and declining rapidly.
In the traditional sense, there is overhead resistance in the form of the now-declining 200-day moving average, just below 4500. The 200-day MA was strong resistance just about two weeks ago.
Another potentially bullish factor which can be taken into consideration is that a McMillan Volatility Band (MVB) buy signal is not far away. On April 28, SPX closed above its -3σ “modified Bollinger Band.” That was a buy signal in the “classic” sense and is marked with a small green circle on the accompanying chart. However, for a MVB buy signal we require further confirmation – a close above the high of April 28. In particular, a close above 4308. That is within range once again.
Equity-only put-call ratios remain on sell signals, as they continue to rise. They are in oversold territory as well. In fact, the weighted ratio is so high that the computer programs we use to analyze these charts are “saying” that it will begin to swing back down now – which would generate a buy signal – merely because of a “return to the mean” sort of analysis. We would prefer some visual confirmation of that potential buy signal, though, before acting on it.
The standard ratio remains solidly on a “sell,” according to those same analysis programs. The last time these ratios were this high was in April 2020, at which time they were on their way down from their March 2020 peaks.
The market breadth oscillators have generated buy signals, as of the close of trading on Wednesday. In addition, there is an “oscillator differential” buy signal. These are short-term indicators and as a result are subject to whipsaws. Regardless, this is a positive turn of events, and could be signaling a short-term move higher.
New 52-week lows continue to dominate new 52-week highs, and thus are not yet rolling over to buy signals. Even on the NYSE, the number of new lows has been extremely high on a daily basis. That is an oversold condition, of course, but it is not a buy signal until new highs begin to dominate.
There was a VIX “spike peak” generated at the close of trading on April 28, and we took a position in line with that positive signal. There was a second, overlapping “spike peak” buy signal on May 3, but we do not act on those overlapping signals, preferring to trade the original signal only.
Those signals are marked with green B’s on the accompanying chart of VIX VIX,
This buy signal will remain in effect for the 22 trading days. unless the signal is stopped out by VIX closing above 33.81.
The trend of VIX remains bearish for stocks at this time. That bearish pressure would be released to a certain extent if VIX were able to close below its rising 200-day moving average, which is currently at about 21.70.
Even so, that alone would not be a buy signal for the intermediate-term. To attain that status, both VIX and its 20-day MA would have to cross below the 200-day MA, and that does not appear to be an event that is likely to occur anytime soon.
The construct of volatility derivatives came dangerously close to a major sell signal earlier this week, but it was avoided. The front-month May VIX futures rose above the price of the June VIX futures for a short time. Had the differential between the two had become just a bit larger, a sell signal would have been generated. But that did not happen, and now June is comfortably above May, restoring the construct to a modestly bullish state.
The term structure of the VIX futures slopes very slightly upward at this time, which is also modestly bullish for stocks.
To summarize, the major trends are bearish, as the SPX chart remains in a downtrend, with the index continuing to make lower highs and lower lows. Similarly, the VIX chart remains in an intermediate-term uptrend for now. As long as those conditions hold, a “core” bearish position is warranted. Around that, however, deeply oversold conditions are beginning to generate some buy signals, and those can be traded around the “core” bearish position.
New recommendation: Potential MVB buy signal
Last week, we spelled out in detail what it would take to get a new MVB buy signal. The complete set of conditions was not met, so no new MVB buy signal has occurred. The first set of conditions was met, so a “classic” modified Bollinger Band buy signal occurred, on April 28, when SPX closed above the -3σ mBB. But we require further confirmation in order for a MVB buy signal to occur. Hence, this recommendation is still open:
IF SPX closes above 4308.40 (the high price of April 28)
THEN buy 1 SPY June (17th) at-the-money call
And sell 1 SPY June (17th) call with a striking price 17 points higher.
New recommendation: Chesapeake Energy
An activist investor is pressing the company CHK,
to maximize shareholder value. Stock volume patterns are strong, and option volume has risen on this news. Moreover, the implied volatility of the options has jumped higher, which is often a strong precursor to a higher stock price. The problem with thatthough, is that the options are quite expensive for an option buyer at this point in time.
Buy 2 CHK May (20th) 95 calls
At a price of 6.00 or less.
CHK: 94.98 May (20th) 95 calls: 4.70 bid, offered at 6.80
If bought, stop yourself out on a close below 86.
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 a roll ref 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 2 ZEN May (20th) 125 calls and Short 2 May (20th) 140 calls: The stock gapped to the upside when Zendesk ZEN,
began to evaluate strategic alternatives. Hold without a stop while the activist activity is in progress.
Long 2 FRT May (20th) 125 calls: The put-call ratio in Federal Realty Investment Trust FRT,
has rolled over to a sell signal, so these calls should be sold now.
Long 3 SAVE May (20th) 25 calls: Hold without a stop for now, as competing bids are still in place for Spirit Airlines SAVE,
Long 2 ENV May (20th) 80 calls: Continue to hold without a stop while the takeover rumors play out.
Long 2 SPY May (20th) 426 puts and short 2 SPY May (20th) 401 puts: We bought this spread in line with the sell signal from the trend of VIX. We will hold this spread as long as VIX remains above its 200-day moving average.
Long 1 SPY May (27th) 428 call and short 1 SPY May (27th) 443 call: This spread was bought on April 28, the day that the latest VIX “spike peak” buy signal occurred. We will hold this position for 22 trading days, unless it is stopped out by VIX closing above 33.81.
Long 4 MAT May (20th) 25 calls: We bought these because of the takeover rumors that have been spreading. Option volume remains at an elevated level when compared to average volume levels. The stock has now broken out to a 5-year high. There has not been any further updates on speculation that the company was talking to buyout firms regarding a potential sale (WSJ). Stock volume patterns are mediocre but improving modestly. There is support at 24. Set a closing, trailing stop at 24.
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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 bestselling book “Options as a Strategic Investment.”
Disclaimer: © McMillan Analysis Corp. 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 Corp., or accounts managed by such persons may have positions in the securities recommended in the advisory.