The stock market has spat at times over the past three weeks, but statements from Federal Reserve Chairman Jerome Powell on Wednesday prompted the S&P 500 SPX,
jump above a technical resistance level at 4030 points.
The benchmark is now challenging the downward 200-day moving average (MA) and the trendline that defines the bear market. A strong move above 4100 would break this downtrend line for the first time this year, potentially ending the bear market.
Note that I am not saying that a rise above 4100 would absolutely be the end of the bear market, but it could lead to this possibility. This current rally has closed the gaps on the so-called island reversal in early September. So the next area of resistance is the August highs just above 4300. The first area of support is between 3900 and 3950, so a move below 3900 would be negative in that it would reverse most of the positive actions of the past few weeks.
The McMillan Volatility Band (MVB) buy signal that took place in early October is still in place. Its target is the “modified Bollinger band” of +4σ, which is now at 4200 and above.
Equity-only put-call ratios are technically still on buy signals. By “technically” I mean that the computer programs we use to analyze these charts always price them as “buy”.
However, a careful examination of the two attached graphs will show that they have not has reached new lows in recent days. This is a bit worrying, as these ratios are expected to trend down while the S&P 500 is trending up. For now, this is only a concern, not a sell signal, but we would like to see these ratios reach new relative lows (below their November lows) to reconfirm their signals. of purchase.
The breadth indicators have been swinging rapidly as the market has been bouncing back for almost a month now. This produced sawtooth signals from width oscillators. For the record, they are now back on buy signals, but we are hesitant to give them too much importance at this time. Yesterday (November 30e) was a 90% “up” day.
New 52-week highs on the New York Stock Exchange have still not hit 100 daily – our minimum requirement for setting up a potential buy signal. As a result, this indicator remains negative for now. There is still a lot of work to do here before a buy signal can take place.
VIXVIX,
has continued to fall, for the most part, since the beginning of October. So the orient oneself of VIX is down and it is bullish for stocks. Specifically, we had a “VIX trend” buy signal in early November, when the VIX 20-day MA broke below the VIX 200-day MA, and that is still in place. VIX’s only concern would be if it reverted to “spike” mode by closing at least 3.00 more points over a period of three days or shorter. It doesn’t seem to be a factor now, but it’s worth watching.
The construction volatility derivatives also remains a positive force for the stock market. The term structures of VIX futures and CBOE volatility indices are sloping upwards. Additionally, VIX futures are trading at healthy premiums to VIX. These are bullish signs for stocks.
Finally, a seasonal bullish trend is in place from Thanksgiving until the second trading day of the New Year. Normally, small caps outperform large caps during this period.
In summary, the bulls have had an impressive run since early October, and a break of the downtrend line of this bear market should be respected. This would not necessarily mean that the bear market is over, but we would no longer recommend holding a “main” bearish position if it does.
New Recommendation: Aerojet Rocketdyne Holdings
The volume of options in Aerojet Rocketdyne Holdings AJRD,
rose sharply yesterday (November 30e) on mergers and acquisitions speculation. The stock is trading at an all-time high. Inventory volume models are strong and improving. There is support at 51.
Buy 2 AJRD Jan. (20e) 50 calls
At a price of 4.10 or less.
AJRD: 52.00 Jan. (20e) 50 calls: offer of 3.30, offered at 4.60.
New Recommendation: Horizon Therapeutics
Option volume in Horizon Therapeutics HZNP,
exploded following the announcement that the company had attracted interest from several major pharmaceutical companies (Amgen AMGN,
Johnson & Johnson JNJ,
and Sanofi SNY,
) but that discussions were at a “highly” preliminary stage. Put option activity was relatively strong. Analysts predict an eventual transaction price as high as $140 per share. Stock volume models are very strong and improving rapidly. There is support at 95-96, potentially.
Buy 1 HZNP January (20e) 100 calls
At a price of 11.00 or less.
HZNP: 100.29 Jan (20e) 100 call: 10.40 bid, offered at 11.20
Follow-up measures
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 hits the short strike, then roll the entire spread. It would be rolling at the top in the case of a call bull spread, or 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 2 Dec. (16e) 375 puts and Short Dec 2 (16e) 355 put options: This is our “basic” bearish position. |As long as SPX remains in a downtrend, we want to maintain a position here. The spread is worth so little that placing a stop is not useful.
Long 1 SPY Dec (23rd) Call 392 and short 1 SPY Dec (23rd) Call 408: This trade is based on the MVB buy signal, which was established on October 4e. We want to roll this gap up and down, since SPY has almost reached the upper strike. Roll up to January (6e) Bullish spread of 408-423 calls (i.e. buy 408 calls, sell 423 calls). The goal of this trade is for SPX to trade in the upper +4σ band. The stop for this position would be if SPX were to close below the -4σ band. We will keep you informed if either group has been affected.
Long 300 KLXE: The stop remains at 2:50 p.m.
Long 2 WRK January (20e) Calls 32.5: We will hold on as long as the weighted the put-call ratio remains on a buy signal.
Long 1 SPY Dec (9e) Call 390 and short 1 SPY Dec (9e) call 410: The spread is based on the rare buy signal of the CBOE Equity put-call ratio only. This broadcast can also be collapsed and expanded now: roll until Jan. (6e) 410-425 call bull spread. As a stop, we will close it if SPX closes below 3900 (note the stop price change).
Long 2 KMB Jan. (20e) 135 calls: We rolled this position last week. We will hold these calls as long as the weighted KMB’s put-call ratio remains on its buy signal.
Long 2 IWM January (20e) 185 call options at parity and Short 2 IWM Jan (20e) 205 calls: This is our position based on the bullish seasonality between Thanksgiving and the second trading day of the New Year. We will adjust this position if IWM rallies during the holding period, but initially there is no stop for the position, so all throughput is at risk.
Long 2 PSX January (20e) 105 put options: We will hold these put options as long as weighted the put-call ratio remains on a sell signal. In other words, as long as the put-call ratio increases.
Send your questions to: lmcmillan@optionstrategist.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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