By Lawrence G. McMillan

Stocks are facing increasing resistance after October highs

As measured by the S&P 500 Index SPX, the stock market has reached the peak of its downward trend. On the accompanying SPX chart, one can see the red lines defining the lower highs and lower lows that make up the downtrend in SPX. SPX has risen almost to the upper red line, which is now around 4400. A breakout above this would be positive.

Additionally, the circle in the chart shows the gap that remained in September. If this gap is closed, it would be another positive for SPX. The gap would close if SPX trades at 4401.60 or higher.

Finally, there is resistance from the October highs in the current area. So all three of these are obstacles to the market. If SPX can break above 4400, it would have overcome all these obstacles and that would be very positive for stocks. However, if the SPX falls again, it will likely fall to at least 4200 and perhaps below fairly quickly.

The McMillan Volatility Band (MVB) buy signal (green “B” on the SPX chart) is still present. His target is the +4<SIGMA> band, which is currently at 4445 and moving sideways.

The pure equity put-call ratios continue to be split. The standard ratio is on a buy signal, but the weighted ratio is still classified as being on a sell signal by the computer programs we use to analyze these charts, even though it was moved slightly this week.

One might think that we should just call the weighted ratio a "buy" since it peaked a few days ago. However, look at the attached weighted ratio chart, 

where there are two green circles. The last time this chart behaved similarly was just a few months ago, and finally the sell signal was forcefully reinstated as the weighted ratio rose and the stock market fell sharply.

At that time, computer analysis also suggested that a buy signal was not yet in place, as is the case now. So we will wait for the confirmed signal before saying that the weighted ratio has turned into a buy signal.

Breadth was strong as the market rebounded from the bottom of its descending trend channel to the top last week. But over the last three days, despite some more modest gains from SPX, breadth has been negative every day, 


and now the breadth oscillators are showing sell signals again. Not only is this disappointing for the bulls, it also calls into question the strength of this rally.

There were fewer than 100 new highs and lows on the NYSE every day, so this indicator remains in a neutral state. The previous sell signal was strong but was stopped on November 3rd.

VIX VIX (VX00) has fallen below 15 again. This leaves the recent VIX buy signal “Spike Peak” in place and the recent VIX sell signal trend stopped. There is currently no discernible trend of VIX signal as VIX is below the 200-day moving average while VIX's 20-day MA is above the 200-day MA.

The volatility derivatives construct has returned to a bullish state in terms of its outlook for the stock market.

The term structures of both the VIX futures and the CBOE volatility indices slope upward, and the VIX futures trade at relatively high premiums to the VIX.

To summarize, we maintain a core bearish position until SPX proves it can break above 4400 and sustain that breakout. In the meantime, we will share more confirmed signals as they occur.

New recommendation: A neutral approach

Since SPX is near 4400, there is a lot of upside potential if it can break out above this level. However, a failure here could easily cause the price to slide back to the lower end of the downtrend zone - into the 4100-4200 area.

This suggests that straddle buying could be a viable strategy at this point. It would show that the market is ready to move in one direction or the other from here and is unlikely to simply remain stuck near the 4400 level. Additionally,

 the VIX is currently at low levels, which is also beneficial for this strategy as there is not much implied volatility built into the price of the straddle.

Buy 1 SPY SPY Dec (8th) call at the money and buy 1 SPY Dec (8th) put with the same strike price. This means we buy 1 SPY Dec (8th) at the money straddle.

We will use a “money” stop here. The straddle costs about 12.75. So if at any daily close it has lost 50% of its original value, stop the position.

New recommendation: AvePoint Corp. (AVPT)

AvePoint (AVPT) recently made a second upward breakout after a consolidation. This is accompanied by strong stock and options volumes.

Buy 5 AVPT calls (December 15) 7 in line with the market.

AVPT: 7.68 AVPT (December 15) 7th Call: 0.85 bid, offered at 1.05

Stop if AVPT closes below 6.75.

Market Insight: Review of October's seasonal trading

The four-day period, which began at the close of trading on October 27th and ended at the close of trading on November 2nd, produced a record gain of 200.41 SPX points. This was the largest point gain ever recorded for this seasonal trading pattern.

The track record now shows 32 wins and 6 losses (and 8 no-trades) in the last 46 years. A “no-trade” occurs in certain years when SPX has not experienced a decline of at least 3.2% at some point in October prior to October 27th.

It was an increase of 4.9%, which is not the record. The percentage gain record was set in 2008 when SPX gained 13.8%, or 115 points, over that four-day seasonal period.

In both cases and many others, the market is oversold at the start of the season, which certainly benefits the bullish side.

This successful seasonal trading follows the mid-September seasonal trading (market selling the week after the September “expiry”), which was also profitable. There's a lot more seasonal business coming up after Thanksgiving and continuing through January, so we're looking forward to that.

Follow-up action:

All stops are mental final stops unless otherwise stated.

We use a “standard” rolling procedure for our SPY spreads: when the underlying reaches the short strike on any vertical bull or bear spread, the entire spread is rolled. In the case of a call bull spread this would be a roll-up, in the case of a bear put spread it would be a roll-down.

Stay in the same sequence and keep the distance between strokes the same unless otherwise stated.

Long 1 Expiring SPY 412 Put (November 10): Bought in line with sell signals from the pure equity put-call ratio. The price was cut several times before the recent market rally. Since this sell signal still exists for now,

 go to the 420 put on December 15th. Continue to roll down every time the put reaches 8 ITM points. Essentially, this is our “central” bearish position.

Long 2 EQR (EQR) Nov 17 52.5 Puts: We will continue to hold as long as the weighted put-call ratio for EQR remains at a sell signal.

Long 0 SPY Nov 10 412 Put: Set in line with the “New Highs vs. New Lows” sell signal. The price was held on November 3 after two consecutive days of new highs surpassing new lows on the NYSE.

Long 3 XLE XLE 86 Puts (November 17): We will hold as long as XLE's weighted put-call ratio remains on a sell signal. If XLE is trading at 80, roll down to December 80 (December 8).

Long 1 SPY Nov (17th) 434 Call Short 1 SPY Nov (17th) 452 Call: This spread was purchased in line with the CBOE Equity only put call ratio buy signal. For now, we will hold on without interruption. Roll the dice if the long side is at least 8 points in the money: in this case, 

sell this spread and buy the same number of the SPY Dec (1st) 442 calls. In this case we would not roll to spread out.

Long 3 ES (ES) 60 Calls from November 17th: We will hold this position as long as the weighted put-call ratio chart for ES shows a buy signal.

Long 0 SPY Nov (10th) 418 Call: We originally purchased two calls in line with October seasonal trading. The position was closed on November 2nd. This proved to be a strong seasonal buying signal this year - the largest SPX gain on record for this system, more than 200 points.

Long 4 XLP XLP Dec (1.) 68 Calls: Diese Calls wurden schließlich am 2. November gekauft, als XLP nach ein paar Wochen des Versuchs über 68,04 schloss. Stoppen Sie bei einem Schlusskurs unter 67 von XLP.

Long 1 SPY Dec (15.) 428 Call und Short 1 SPY Dec (15.) 443 Call: Diese Position wurde im Einklang mit dem jüngsten MVB-Kaufsignal gekauft. 

Wir werden diese Position beibehalten, bis entweder SPX das +4<SIGMA>-Band erreicht oder unter dem -4<SIGMA>-Band schließt, je nachdem, was zuerst eintritt. Beides wurde bisher nicht erreicht.

Alle Stopps sind mentale Schlussstopps, sofern nicht anders angegeben.

Senden Sie Fragen an: lmcmillan@optionstrategist.com.

Lawrence G. McMillan ist Präsident von McMillan Analysis, einem registrierten Anlage- und Rohstoffhandelsberater. McMillan kann sowohl persönlich als auch auf Kundenkonten Positionen in den in diesem Bericht empfohlenen Wertpapieren halten. Er ist ein erfahrener Händler und Vermögensverwalter und Autor des Bestsellers „Options as a Strategic Investment“. www.optionstrategist.com

(c)McMillan Analysis Corporation ist bei der SEC als Anlageberater und bei der CFTC als Rohstoffhandelsberater registriert. Die Informationen in diesem Newsletter wurden sorgfältig aus Quellen zusammengestellt, die als zuverlässig gelten. Für Richtigkeit und Vollständigkeit kann jedoch keine Garantie übernommen werden. Die leitenden Angestellten oder Direktoren der McMillan Analysis Corporation oder von solchen Personen verwaltete Konten können Positionen in den in der Empfehlung empfohlenen Wertpapieren halten.