Opinion: Improving technical indicators put stock-market bulls back in charge

The SPX chart is still trending higher; that has not changed. There is support at 3850-3870, and resistance at the all-time highs in the 3985-3995 area. A breakout in either direction from those levels would be significant. 

In the past two weeks, the bears had a chance to take control, as there was some deterioration in the internals of the market. However, the bears stumbled again, as they have done so many times since March 2020, and the internals have improved. Thus, the bulls now have their chance at a breakout – this time to the upside, of course.

Technically, there is also support in the 3700-3725 area and at 3630. But those are not meaningful unless SPX does break down below 3870.

The S&P index has essentially been trading sideways since mid-March, and that has reduced realized volatility. Thus, the “modified Bollinger Bands” are beginning to converge inward on the 20-day moving average. But there is no imminent sign of SPX exceeding either of the +/-4σ Bands.

Equity-only put-call ratios are seeing a new development as well: the weighted ratio is now on a buy signal, according to the computer programs that we use to analyze these charts. As you can see from accompanying graph, it has fallen back slightly from its peak of four days ago. That is enough for the computer to rate it as a “buy.” I have placed a question mark next to the “B” on the chart, though, because it doesn’t look like it would take much for the weighted ratio to move above the late-March high, and that would cancel out the sell signal. 

Meanwhile, the standard ratio is in a similar state, as it has been moving sideways for the last four days. However, the standard ratio is still at a ridiculously low (overbought) level on its chart. That also does not perpetuate a sell signal, though, as it’s been extremely overbought since last June, when it crossed below the levels of January 2020.

Breadth had been one of those indicators that we classified as a “negative” internal indicator for the market. That’s because the breadth oscillators had rolled over to sell signals in mid-to-late March. But now, they are back on buy signals as of March 25. This is a “true” buy signal because the “stocks only” breadth oscillator had fallen into extreme oversold territory, below –400, before recovering and generating this buy signal. 

The cumulative breadth indicators have not reached new all-time highs. At this point, that is not a negative divergence, although it will bear watching closely if SPX does move to new all-time highs and these cumulative breadth indicators do not.

New 52-week highs have outnumbered new 52-week lows for the last three days, and that is another internal indicator that has improved. It is now back on a buy signal, after a brief dalliance with a sell signal.

Volatility remains a favorable indicator for stocks. In almost every facet, VIX
VIX,
-7.47%
and its derivative products have been generating bullish signals for the stock market for a long time now. The VIX “spike peak” buy signal of March 5 is still in force, and unless VIX spikes upward, this buy signal will be in effect through April 7. 

Even after that, although the system we built to trade these “spike peaks” says to exit, it would not be a sell signal. The trend of VIX, which we define by the relationship of VIX, its 20-day moving average, and its 200-day moving average, remains downward (VIX and the 20-day are below the 200-day), and that is bullish for stocks.

VIX has not been significantly below 20 since February 2020. It seems now, though, that is pushing hard against “support” and could easily break down. Typically, near market tops VIX is below 14, not at 20. So, perhaps an SPX upside breakout could trigger a VIX decline toward those lower levels. 

The construct of volatility derivatives remains bullish for stocks. The term structures of both the VIX futures and of the CBOE Volatility Indices are sloping upward – at least for four to six months. Moreover, the VIX futures are trading at a healthy premium to VIX. Those factors keep this as a bullish indicator for stocks.

In summary, we are remaining positive on the market as long as the trends of SPX (upward) and VIX (downward) are in place. We will trade any sell signals, in small size, around that position, but the “core” long position is primary at this point in time.

New recommendation: Conditional breakdown in VIX

If VIX closes below its most recent closing low of 18.86 (March 26), that would indicate to me that VIX is ready to move lower. We can trade this move directly through VIX options. Remember that the underlying for any VIX option is the corresponding VIX future and not VIX itself.

IF the VIX Index closes below 18.86,

THEN buy 2 VIX April (21^st) at-the-money puts

VIX: 19.40 VIX April futures: 20.73

With the April futures at 20.73, “at the money” would be 21 – the nearest strike to the April futures price. The VIX Apr (21^st) 21 put is offered at 2.25.

New recommendation: Applied Materials

There have not been any new, material takeover rumors or activity over the past week. Thus, we look elsewhere for a recommendation, and Applied Materials
AMAT,
+5.11%
has just broken out to a new all-time high, with positive stock and option volume patterns.

Buy 1 AMAT Apr (16^th) 135 calls

At a price of 5.80 or less.

AMAT: 133.60 Apr (16^th) 133 call: 5.80 offered

If bought, stop yourself out on a close below 129.

Follow-up action

All stops are mental closing stops unless otherwise noted.

Long 500 CLIR common stock: Raise the stop to 4.50.

Long 0 IVZ: All Invesco
IVZ,
+1.46%
positions were stopped on out March 24, when the stock closed below 23.40. Overall, this position was closed for a large profit.

Long 2 SPY April (9^th) 377.5 calls and short 2 SPY April (9^th) 392.5 calls: This position was taken in line with the VIX “spike peak” buy signal of March 5. It will remain in place for 22 days, unless stopped out by a return to “spiking mode” by VIX (a gain of at least 3.00 points by VIX – using closing prices – over any one-, two- or three-day period). If it is stopped out in that manner, then prepare to take the next buy signal, according to the rules that were laid out previously.

Note that 22 trading days from March 5 is April 7. So beginning with next week’s report, we will be using a trailing stop based on SPY and not the conditions based on VIX.

Finally, roll this spread up and out to lock in some of the profits, and we are going to own a straight long call instead of a bull spread (as VIX has dropped, the bull spread is no longer needed). Sell the current spread and replace with an equal number of the long SPY April (23^rd) at-the-money calls.

Long 3 MX Apr (16^th) 20 calls: Magnachip Semiconductor
MX,
+0.54%
accepted a deal to be taken private at $29 by private equity. The stock is trading below that level, though, so there may be some problems with financing. There is also some involvement with a company from the Cayman Islands. Sell a third of your position to take a partial profit and hold the balance for now. The stop remains at 20.50.

Long 2 SPY April (16^th) 394 calls and short 2 SPY April (16^th) 407 calls: Stop yourself out of this position if SPX closes below 3870. If SPY trades at 407, then sell the spread and replace it with an equal number of plain long SPY April (23^rd) at-the-money calls.

Long 1 COHR Apr (16^th) 265 call: Hold without a stop while the bidding war plays out.

Long 3 FLY Apr (16^th) 12.5 calls: This is another of our long stocks that received a takeover bid, and this one seems more solid than Magnachip Semiconductor. Carlisle Aviation is buying Fly Leasing
FLY,
+0.12%
for $17.05 per share, in cash. Sell your long calls now to take the profit; do not sell below parity.

Long 2 CXP Apr (16^th) 15 calls: Hold without a stop while the takeover bid works its way forward. The bid is $19.50, but there are rumors that the stock will trade higher.

Long 0 SPY Apr (16^th) 386 put and short 0 SPY Apr (16^th) 356 put: This put spread was bought because the “new highs vs. new lows” indicator had generated a sell signal. It was stopped out on March 29, though, when new highs had outnumbered new lows for two consecutive days. The other two contingent sell signals did not take place, and they are canceled at this time.

Long 4 BOX April (16^th) 22 calls: Hold without a stop, while the activist investor process is worked out.

Send questions to: lmcmillan@optionstrategist.com.

Lawrence G. McMillan is president of McMillan Analysis, a registered investment and commodity trading 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”.

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 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.