Opinion: The stock market trend is relentlessly bearish, especially after this week’s sharp daily declines

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The stock market fell on September 13 when a monthly government report showed widespread inflation across the economy.

One would have thought that professional traders would have anticipated such a possibility, but the euphoria that preceded the announcement was too much.

As a result, “everyone” tried to sell at the same time, and the S&P 500 SPX index,
-1.47%
sank, recording the fifth largest single-day one-point drop in history. (The fourth biggest happened earlier this year, and the top three were in March 2020 at the start of the pandemic.)

This negative action left what is called an island rollover on the SPX chart. There is also an island reversal on the map starting in mid-August. These are unusual formations on a broad index chart, and they are usually negative. SPX has found support near 3,900 points so far. If that is breached, then 3,800 is the next level of support, with yearly lows at 3,637 providing support below.

On a more positive note, a McMillan Volatility Band (MVB) buy signal was confirmed on September 9th. It is marked with a green “B” on the SPX chart above. Its target is the ‘modified Bollinger Band’ (mBB) above +4σ, which is currently above 4,300. This MVB buy signal would be stopped at the close below the -4σ band, which is rapidly falling on the hour. current.

Equity-only put-call ratios remain on sell signals as they continue to rise. As long as these ratios increase, it is negative for the stock market. It is interesting to note that the last stock market rally — at the beginning of September — did not not record a sharp drop, if any, in these ratios. In other words, traders were still buying put options despite the rally.

The breadth of the market has had a few huge days back and forth lately. The width numbers were very strong at the beginning of this month, and both width oscillators thus generated buy signals. However, the huge down day on September 13 was a “90% down day”, which brought the “equities only” oscillator back to a sell signal. Technically, the NYSE Width Oscillator is still on a buy signal as of September 15th, but one more day of solidly negative width would negate that.

New 52-week highs on the NYSE continue to be very few, so this indicator remains on a sell signal. It has been bearish since early April, as very few stocks have been able to record new 52-week highs since then.

The indicator that has been more positive than most is VIX VIX,
+3.88%,
the CBOE 30-day volatility index. It recorded two buy signals about a week ago, but both have since been halted.

The first was a “spike” buy signal on September 8, but it was stopped on September 13, when VIX returned to “spike” mode. As VIX is still in spike mode, a new “spike peak” buy signal will be issued soon. Specifically, this will happen when VIX closes at least 3.00 points below the highest price it reached in spiking mode. This high so far was 28.15 on September 13th. If the VIX does not register a higher price today, a close at or below 25.15 would generate a new “spike” buy signal.

Additionally, when VIX rose earlier this week and held its gains, it halted the orient oneself of the VIX buy signal. This happened when VIX closed above its still rising 200-day moving average for two consecutive days. This is not a orient oneself of the VIX sell signal, however, as this would require the 20-day moving average of VIX to also cross above the 200-day moving average. The 20-day time frame increases, but it remains more than one point below the 200-day time frame.

The construction volatility derivatives remains in a slightly positive state for equities. There had been a slight reversal in the term structure ahead – in both VIX futures and CBOE volatility indices – but that was only temporary.

In summary, SPX’s trend is still down, and that’s what defines a bear market (not the arbitrary 20% figure claimed by the media). We therefore maintain a bearish “basic” position. We will trade further signals around this “middle” position as they are confirmed.

New Recommendation: Potential Buy Signal for VIX “Peak”

As described above, another “spike” buy signal will soon be confirmed. This indicator has suffered some small losses recently, but its long-term track record is stellar, so we’re not going to “jump” a signal.

IF VIX closes below 25:15,

THEN Buy 1 SPY Oct (21st) call for parity

And sell 1 SPY Oct (21st) call with a strike price 15 points higher.

If established, stop if VIX closes above 28.15.

New recommendation: SPY straddle buy

The S&P 500 is very close to support at 3,900. It could register another oversold bounce from there, or conversely, if it breaks below there, then a more severe market decline could take place. . Thus, it seems that a long straddle near the 3,900 level is a reasonable options strategy. Typically, the most volatile action in the market takes place in September and October, so we’ll set the expiration date for this straddle buy around the end of October:

Buy 1 SPY Oct (28e) call for parity

And buy 1 SPY Oct (28e) equalization

As a follow-up action, if SPY trades 25 points above your strike, then initiate the Call Strike up to 25 points. Similarly, if SPY trades 25 points below your strike, then roll the put strike down 25 points.

Follow-up actions:

All stops are mental closing stops unless otherwise stated.

We use a “standard” rolling procedure for our 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 10 expiring CRNT Sept. (16e) 2.5 calls: Aviat Networks (AVNW) offered a price of essentially $3.08 for CRNT, but CRNT is not interested in selling. We are not going to invest any more money in this position, so let these calls expire and do not replace them.

Long 3 MRO Oct (21st) 24 calls: We will keep this position as long as the put-call ratio for MRO remains on a buy signal.

Long 1 SPY October (21st) 396 puts and shorts 1 SPY Oct (21st) 366 set: This is our “basic” bearish position. It has been reduced by 30 points with each strike, as SPY has traded at 396 this week (in accordance with our general “rollover” rule stated above). There are no more stoppages for this position at this time.

Long 2 expiring SGEN Sept. (16e) 170 calls and Court 2 SGEN Seven (16e) 185 calls: This spread was purchased after rumors of a takeover by M.K.R. were spreading. It didn’t materialize, so let those calls expire and don’t override them.

Long 6 CANO Oct (21st) 7 calls: Stop on a close below 5.50.

Long 2 BFB October (21st) 75 put options: We will hold these puts as long as BFB’s put-call ratio is on a sell signal.

Long 1 October SPY (7e) Call 398 and Short 1 SPY Oct (7e) Call 413: This was bought at closing on September 7e, since the VIX “peak” buy signal was finally confirmed at that time. Technically this was shut down a few days ago, but we didn’t specify a shutdown in the last report. So let’s set a tight one now: stop if VIX closes above 27.80.

Long 0 SPY October (7e) 400 call and Short 0 SPY Oct (7e) call 415: This spread was purchased in accordance with the orient oneself September 8 VIX buy signale. This spread was stopped on September 14eafter VIX firm above 25:00 for two consecutive days.

Long 1 SPY October (28e) Call 406 and Short 1 SPY Oct (28e) call 421: This spread was bought in accordance with the McMillan Volatility Band (MVB) buy signal on September 9e. Stop if SPX closes below -4σ, which is currently at 3830 and falling rapidly – so it’s not really “in play” right now.

Long 6 HOLI October (21st) 20 calls: Hold on without stopping for now.

Send your questions to: [email protected]

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.

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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