The S&P 500 Index (SPX) has recently retreated after a strong upward move that began on June 9th when it broke out over 4300. Although there have been no tradeable sell signals yet, a few overbought conditions have surfaced. Given the current short, negative seasonal period, this pullback is not worrisome.
If the market remains near the current levels, support should be found at both 4200 and 4300 since these were previously resistance areas on the way up. However, if there is a below-4200 move, it could signal that the latest upside action was just a temporary false move.
Recently, the SPX closed below the +3σ Band after having closed above its +4σ “modified Bollinger Band” for several days. This setup constitutes a “classic” mBB sell signal, which has been profitable overall, but unreliable at times. Hence, we have implemented the McMillan Volatility Band (MVB) sell signal as further confirmation. If SPX closes below 4351 in the future (which is not guaranteed), it will generate an MVB sell signal.
The equity-only put-call ratios have been falling and are currently at extreme lows on their charts, indicating that they are in very overbought territory. The recent sell signals in the last year or two were generated at or below these levels. However, we are only interested in the trend of the ratio and do not consider where past levels occurred. As long as these ratios continue to fall, they will remain on buy signals, but sell signals will be in place only when they start to rise.
Stock Market Indicators Update
The current state of the stock market indicators can be described as oscillating. NYSE breadth has been fluctuating in both positive and negative directions; hence, the breadth oscillators are currently unreliable indicators. Although the breadth oscillators are signaling a sell at the moment, we are not making any decisions based on them.
On the other hand, NYSE New 52-week Highs continue to outpace New 52-week Lows, generating a dependable buy signal that was first observed on June 7.
VIX, the Chicago Board Options Exchange Volatility Index, has been consistently declining even as the S&P 500 has pulled back from its recent highs. It is currently trading at its lowest levels since January 2020, before the onset of the pandemic crisis. Although some may consider VIX to be overbought at these historically low levels, it is still not negative. A warning or a sell signal generated by VIX would only be triggered in case of a sharp increase and a return to what we refer to as the “spiking” mode.
When VIX is in spiking mode, the stock market falls rapidly, but a new buy signal is expected afterward. However, for VIX to move into spiking mode, it needs to rise by at least 3.00 points (using closing prices) over any one-, two-, or three-day period. At present, VIX would need to close above 16.20 to enter spiking mode. Meanwhile, the trend of VIX buy signal that was issued in March still remains strong.
In terms of volatility derivatives, the bullish signals are being generated for the stock market. The term structures of VIX futures and of CBOE Volatility Indices slope upwards, and the VIX futures are trading at large premiums to VIX. Also, the July VIX futures are now the front month. Thus, a warning sign of trouble would only be if the July VIX futures were to rise in price above the August VIX futures, which seems unlikely in the near future.
Maintaining a “Core” Bullish Position with SPX Chart
As a result of the positive nature of the SPX chart, we are continuing to maintain a “core” bullish position. This “core” position will be traded around established and confirmed signals, ensuring that it remains intact.
Potential MVB Sell Signal: New Recommendation
On June 21, a “classic” mBB sell signal took place, and should SPX close below the low of 4151 generated on this day, a MVB sell signal will take place. If this occurs, traders must:
- Buy 1 SPY Aug (18th) at-the-money put
- Sell 1 SPY Aug (18th) put with a striking price 30 points lower
This signal will be held until SPX trades at the -4σ Band (the profit “target”) or trades above the +4σ Band, which would result in the trade being stopped out.
New Recommendation: Viatris Inc. (VTRS)
A new buy signal has been discovered from the weighted put-call ratio in Viatris Inc. (VTRS), and as a result, we advise traders to take up a long call position. The recommended procedure is to buy ten VTRS August (18th) 10 calls at a price of 0.60 or lower.
SPY Spreads: Rolling Procedure
For SPY spreads, we recommend using a “standard” rolling procedure. Should the underlying hit the short strike in a vertical bull or bear spread, the entire spread should be rolled up (in the case of a call bull spread) or rolled down (in the case of a bear put spread). Traders should remain in the same expiration and keep the distance between the strikes the same, unless otherwise instructed.
AMAM July (21st) 12.5 Calls
Traders should raise the trailing stop to 13.00 for long 3 AMAM July (21st) 12.5 calls.
HAL July (21st) 30 Calls
Traders should hold on to the HAL position as long as the weighted put-call ratio remains on a buy signal.
MXL July (21st) 30 Puts
Long 0 MXL July (21st) 30 puts should be stopped out when MXL closes above 31 on June 20th.
Traders should keep the stop at 1.70 for long 800 KOPN.
Trading Strategies for July
Key Calls and Stop Loss Guidelines
If you’re looking for profitable trading strategies for July, consider the following long positions on SPY and PFG:
Long 2 SPY July (7th) 439 Calls
This is our “core” bullish position, bought on the upside breakout. We’ll stop out of this trade if SPX closes below 4200. The position has been rolled up once already, and we recommend doing so every time your long SPY option is at least 6 points in-the-money.
Long 1 SPY July (7th) 439 Call
Bought in line with the “New Highs vs. New Lows” buy signal. For this position, we’ll stop out if, on the NYSE, New Lows outnumber New Highs for two consecutive days. We’ve also rolled up this position once, and recommend doing so every time your long SPY option is at least 6 points in-the-money.
Long 2 PFG July (21st) 70 Calls
We’ll hold these calls as long as the weighted put-call ratio remains on a buy signal.
Lawrence G. McMillan, president of McMillan Analysis, is an experienced trader and money manager with a best-selling book, Options as a Strategic Investment. While he may hold positions in securities recommended in this report, both personally and in client accounts, the information provided is carefully compiled from sources believed to be reliable. However, accuracy and completeness are not guaranteed.