These key indicators say the S&P 500 will continue its hot streak

By Lawrence G. McMillan

The S&P 500 looks solid, while new highs on the NYSE continue to swamp new lows

The S&P 500 SPX has finally broken through to an all-time high. It has confirmed the breakout by continuing to close above 5,670 every day since the breakout occurred on Sept. 19. There is support at 5,560, and I suppose one could make a case that SPX could slip back as far as 5,560 and still be in the general area of a new upside breakout.

Any pullback below 5,560, though, would be a deal-breaker and would label this recent move as a false breakout. I do not expect that to happen.

The McMillan Volatility Band (MVB) buy signal of Aug. 12 remains in place. Our position has been rolled up a couple of times, and the target for this signal is the +4<SIGMA> Band, which is currently near 5,800.

Equity-only put-call ratios began to rise this week, as traders were buying puts to protect gains after the upside breakout. The computer programs that we use to analyze these put-call ratio charts were calling for sell signals, but as one can see, the ratios have only risen slightly. On the chart below I have labeled the weighted ratio as "S?" but these potential sell signals would be averted if the ratios fell back to new relative lows, below last week's lows.

Market breadth has remained fairly strong, so the breadth oscillators are still on buy signals. They are in overbought territory, but that is a good thing with SPX breaking out to new all-time highs. Moreover, cumulative volume breadth (CVB) has made new highs along with SPX, giving further confirmation to the upside breakout. CVB has made new all-time highs now seven times since Aug. 23.

New highs on the NYSE continue to swamp new lows. This indicator therefore remains bullish for stocks, as well. It would only retreat from its bullish stance if new lows were able to outnumber new highs for two consecutive days on the NYSE.

VIX VIX continues to give mixed signals. The "spike peak" buy signal of Sept. 5 is still in place. But so is the trend of VIX sell signal, since VIX continues to trade above its 200-day moving average (MA). The chart below shows the 200-day MA nearing 15 as it is slowly rising. VIX is just above 15. So that sell signal is not far from being stopped out, but as of now, it is still in place.

The construct of volatility derivatives remains mostly bullish in its outlook for stocks as well. There is still some consternation over the "election bump" in implied volatility for SPX options expiring just after the election. That is not particularly worrisome, at least not yet.

In summary, most of our indicators are bullish, and so we are recommending a "core" bullish position. We will continue to trade all indicator signals when they are confirmed. Also, we will roll deeply in-the-money options to take partial profits while still keeping profit potential intact.

As long as SPX continues to close above 5,670, a "core" bullish position can be maintained:

Buy 1 SPY SPY (Oct. 25) at-the-money call and sell 1 SPY (Oct. 25) call with a striking price 20 points higher.

If there is not a striking price that is exactly 20 points higher, then use the one that is closest to 20 points. Sell this spread if SPX closes below 5,670 for two consecutive days.

New recommendation: Prologis Inc. (PLD)

A put-call ratio sell signal has been issued in Prologis (PLD). Buy 2 PLD (Nov. 15) 125 puts in line with the market.

We will hold these puts as long as the put-call ratio remains on a sell signal.

New recommendation: Walgreens Boots Alliance (WBA)

There's a longer-term potential buy signal from Walgreens Boots Alliance (WBA). We are keeping this recommendation open but will not continue to reprint the reasoning behind the trade, other than to say that stocks that have been removed from the Dow Jones Industrial Average DJIA usually experience a strong rally within a matter of weeks after that removal.

We are retaining the same entry points as last week: If WBA closes above 9.80, then buy 2 WBA (Oct. 11) 9.50 calls, in line with the market.

Follow-up actions:

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 1 SPY (Oct. 11) 550 put: This S&P 500 ETF position is based on the trend of VIX sell signal and would be stopped out if VIX closes below its 200-day MA for two consecutive days.

Long 1 SPY (Oct. 18) 553 call and short 1 SPY (Oct. 18) 573 call: This spread was bought at the close of trading on Aug. 15, when NYSE new highs numbered more than 100 for the second consecutive day. It would be stopped out if, on the NYSE, new lows outnumber new highs for two consecutive days.

Long 3 CMG (Oct. 18) 57 calls: We will hold CMG (CMG) as long as the weighted put-call ratio of CMG remains on a buy signal.

Long 1 SPY (Oct. 18) 570 call and long 1 SPY (Oct. 18) 549 put: This was initially a long straddle, intended to capture a large move in either direction. The puts were rolled down 10 points on Sept. 5, when SPY traded at 549. The calls were rolled up this past week, on Sept. 19. Continue to roll either side if it gets 10 points in-the-money; alter the strike, not the expiration date.

Long 2 AOS (AOS) (Oct. 18) 80 calls: We will hold these calls as long as the weighted put-call ratio remains on a buy signal.

Long 1 SPY (Oct. 18) 550 call and short 1 SPY (Oct. 18) 570 call: This was bought in line with the latest VIX "spike peak" buy signal of Sept. 5. Stop out if VIX rises 3.0 points or more over any three-day or shorter time frame, using closing prices. As of Thursday, that would make the stop a close at 18.39 or higher. Otherwise, we will hold for 22 trading days.

Long 10 WEAT WEAT (Oct. 18) 5 calls: These were bought because of the put-call ratio buy signal in wheat futures. We will continue to hold WEAT as long as that buy signal is in effect.

Long 2 PDD (PDD) (Oct. 18) 95 calls: These were bought because of the MVB buy signal in PDD Holdings. PDD has now traded at the +4<SIGMA> "modified Bollinger Band" so sell these calls now to take the profit and close the position.

Long 2 SPY (Oct. 4) 568 puts: These are to play the bearish seasonal that typically occurs after the third Friday in October. Sell the puts to exit the position at the close of trading on Friday, Sept. 27. If the puts should become eight points in-the-money at any time, roll down to the at-the-money strike, staying in the Oct. 4 expiration.

Long 6 APA (APA) (Oct. 18) 25 calls: This is an MVB buy signal. Sell the calls if APA trades at $28.50 at any time. Stop yourself out if APA closes below $23.50.

Long 2 ABNB (ABNB) (Oct. 18) 120 calls: The stock has continued to rise, so roll up to the ABNB (Oct. 18) 130 calls. Stop out if ABNB closes below 121.

All stops are mental closing stops unless otherwise noted.

Send questions to: lmcmillan@optionstrategist.com.

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 Options As A Strategic Investment. www.optionstrategist.com

Disclaimer:

(c)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.

-Lawrence G. McMillan

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

09-26-24 1646ET

Copyright (c) 2024 Dow Jones & Company, Inc.