MarketWatch Options Trader: Bear-market rally gains momentum as stocks head into positive end-of-year sentiment


The S&P 500 Index rallied this week, pushing forward the bullish case.

The close above resistance at around 4000 points

was a positive step, and it sets up a move to at least the 200-day moving average (MA), or to 4070-4100.

The McMillan Volatility Band (MVB) buy signal remains in effect, with the “target” still a touch off the +4σ MVB level (around 4150, currently). Support remains around 3900 and, more importantly, 3800.

The equity-only put call ratios have started to curl higher, with the CBOE ratio again posting an extreme/suspect reading of 1.34 level (above 1 is rare). This is potentially bearish, but so far, the computer analysis continues to confirm that these ratios are on buy signals.

Breadth has flip-flopped between buy and sell signals of late, so we are not relying on this indicator heavily at this time.

New 52-week highs vs. new 52-week lows remains on a longer-term sell signal.      

The intermediate-term trend of VIX remains downward, and that is bullish for equities. In addition, the construct of the VIX futures curve is upward-sloping, with an expanding premium in the VIX futures relative to the VIX Index (almost over 2). So these are bullish signs.  The first sign of trouble would be if VIX were to rise at least 3.00 points over any three-day period.

Seasonality now turns bullish with regards to equities through the second trading day of the new year. The most notable exception to this normally bullish pattern was late 2018, but it is usually quite reliable. Furthermore, small-caps tend to outperform large-caps during this period.

In summary, the SPX chart is still in a downtrend, so the current rally is still just a bear market rally. 

Stock prices and the technical backdrop are both in synch (short-term bullish) and seasonality is turning bullish as well. Therefore, the bull case appears to have regained momentum, but it is important that it maintain positive price momentum.  A close below 3900 could be a game-changer.

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 2 Dec (16th) 375 puts and Short 2 Dec (16th) 355 puts: this is our “core” bearish position. As long as SPX remains in a downtrend, we want to maintain a position here.

Long 1 SPY Dec (23rd) 392 call and short 1 SPY Dec (23rd) 408 call: this trade is based on the MVB buy signal, which was established on the morning of October 4th. This trade’s target is for SPX to trade at the upper, +4σ Band. The stop for this position would be if SPX were to close back below the -4σ Band. We will keep you informed if either Band has been touched.

Long 300 KLXE: raise the stop to 14.50.

Long 2 WRK Jan (20th) 32.5 calls:  we will hold as long as the weighted put-call ratio remains on a buy signal.

Long 1 SPY Dec (2nd) 371 put and Short 1 SPY Dec (2nd) 351 put: when breadth was negative on the NYSE on November 3rd, we established this position. The breadth oscillators are no longer on sell signals, so exit this position now.

Long 1 SPY Dec (9th) 390 call and short 1 SPY Dec (9th) 410 call: the spread is based on the rare CBOE Equity-only put-call ratio buy signal. As a stop, we will close it out if SPX closes below 3900 (note the change in stop price).

Long 2 KMB Jan (20th) 125 calls: roll up to the Jan (20th) 135 calls.  We will hold these calls as long as the weighted put-call ratio of KMB remains on its buy signal.

Long 2 IWM Jan (20th) 185 at-the-money calls and Short 2 IWM Jan (20th) 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 the entire debit is at risk.

Long 2 PSX Jan (20th) 105 puts:  We will hold these puts as long as the weighted put-call ratio remains on a sell signal. That is, as long as the put-call ratio is rising.

Send questions to:

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.


©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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