MarketWatch Options Trader: The short-term outlook for the S&P 500 doesn’t look good after a mini-rally stalled

Meanwhile, a McMillan Volatility Band (MVB) sell signal has been confirmed. First, SPX had traded above the +4σ “modified Bollinger Band” (mBB). Then it fell back below the +3σ Band. That action created what we call a “classic” mBB sell signal. Finally, the MVB “sell” was confirmed when SPX dropped further. Its target is the -4σ Band, which is currently near 4000. A close above the +4σ Band would stop out this trade.

Equity-only put-call ratios are suddenly mixed in their outlook. Both had recently curled upward, thereby raising the possibility that they might roll over to sell signals. However, the standard ratio remains on a buy signal after making a new relative low yesterday.

The weighted ratio, though, has moved higher and is now on a confirmed sell signal (confirmed by our computer analysis programs). Rarely, these can reverse, so we will wait for confirmation that both ratios are in agreement before acting on this potentially new sell signal.

Market breadth deteriorated badly during the selling on Aug. 19 and 22, and as a result, both breadth oscillators have rolled over to sell signals. They remain in that state currently. This is our shortest-term indicator and thus can flip back and forth quickly, but it has a viable track record, so this sell signal can be acted upon.

New 52-week highs on the NYSE continue to lag (there were only 38 yesterday). New lows are exceeding the number of new highs, so this indicator remains bearish for stocks.

VIX has risen as the market has fallen. First of all, that has put VIX
VIX,
-3.64%
back into “spiking” mode. A new “spike peak” buy signal will be confirmed when VIX closes at least 3 points below the highest price that it has reached while in “spiking” mode. So far, that highest price is 24.86. We have not had a “spike peak” buy signal since mid-June.

Countering that bullish data to some extent is the fact that VIX is approaching its still-rising 200-day moving average. If VIX were to close above that 200-day MA, it would terminate the intermediate-term trend buy signal that recently went into effect. So, we will be getting signals from VIX soon, but it’s not clear whether there will merely be the “spike peak” buy signal or a conflicting sell signal as well.

The construct of volatility derivatives continues to be a modestly positive indicator for the stock market. That’s because the term structures of the VIX futures and of the CBOE Volatility Indices slope upward, and the VIX futures are trading at rather large premiums to VIX.

In summary, we are maintaining a “core” bearish position in line with the continuing downtrend that is in place on the SPX chart. In addition to that, we will trade the individual signals as they occur — both buy and sell — from the other indicators.

New recommendation: Potential “spike peak” buy signal

As noted above, VIX is in “spiking” mode. That means it has risen more than 3.00 points (using closing prices) over a three-day period. Specifically, that occurred on Aug. 22. It will generate a buy signal (for the stock market) when it closes at least 3.00 points below the highest price that it reached while in “spiking” mode.

So far, that buy signal has not been confirmed. The highest price that VIX has reached is 24.86 on Aug. 24. If that is not exceeded, then a buy signal will occur when VIX closes below 21.86. The trading system that we built around VIX “spike peaks” has been a successful one for many years, so we want to take this trade when it confirms:

IF VIX closes at least 3.00 points below the highest price it has reached from August 24th and going forward,

THEN Buy 2 SPY Oct (7th) at-the-money calls

            And Sell 2 SPY Oct (7th) calls with a striking price 15 points higher.

This trade would be stopped out if VIX went back into “spiking” mode. Otherwise, it will be held for 22 trading days — about a month.

New recommendation: Cano Health

Option volume in Cano Health Inc.
CANO,
+2.00%
has continued to increase in response to news that Owl Creek Asset Management had sent a letter to the CANO board of directors strongly urging the company to pursue a sale to a strategic buyer. Stock volume patterns are positive and improving. There is support at 5.25.

Buy 6 CANO Oct (21st) 7 calls

At a price of 1.45 or less.

Follow-up action

All stops are mental closing stops unless otherwise noted.

We are going to implement a “standard” rolling procedure for our SPY
SPY,
+1.39%
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 10 CRNT Sept (16th) 2.5 calls: Aviat Networks (AVNW) has bid a price of essentially $3.08 for CRNT, but CRNT is not interested in selling. We rolled to September last week. Continue to hold.

Long 2 AAPL Sep (16th) 170 calls were rolled up again when AAPL traded at 170. Roll up again – to the Sept (16th) 180 calls — if AAPL trades at 180 at any time. The put-call ratio looks like it is beginning to roll over, so set a stop here: sell these calls if AAPL closes below 166.

Long 1 SPY Sept (16th) 426 call and Short 1 SPY Sept (16th) 439 calls: Spreads were originally bought on July 21, when several indicators generated buy signals. Then they were rolled up and eventually out. We will stop ourselves out of this trade if the equity-only put-call ratios roll back to sell signals.

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

Long 1 SPY Sept (16th) 414 call and short 1 SPY Sept (16th) 429 call: This was bought in line with VIX beginning to trend down on Aug. 4. We will hold it as long as VIX does not cross back above its 200-day moving average. Specifically, stop yourself out if VIX closes above 24.60 for two consecutive days.

Long 2 OIH Sept (16th) 230 calls and short 2 OIH Sept (16th) 250 calls: We will hold this position as long as the weighted put-call ratio for OIH remains on a buy signal.

Long 0 SPY Sept (16th) 423 call and Short 0 SPY Sept (16th) 438 call: This position was stopped out when SPX closed below 4160 on Aug. 22.

Long 3 SGFY Sept (16th) 22.5 calls: We are holding without a stop, in order to see if anyone does submit a bid for SGFY. There is still no bid, but there are supposedly now more interested parties, as United Health Group (UNH), Amazon (AMZN), CVS Health (CVS) and Option Care Health (OPCH) are all rumored to be interested in acquiring SGFY, with the highest bid rumored to be around $30 (UNH). Stock volume patterns are very strong. There is support at 23.

Long 1 SPY Oct (21st) 426 put and Short 1 SPY Oct (21st) 396 put: This is our “core” bearish position. Stop yourself out if $SPX closes above 4330 (note change in stop price).

Long 2 SGEN Sept (16th) 170 calls and Short 2 SGEN Sept (16th) 185 calls: This spread was bought after rumors of a takeover by MRK were spreading. Hold these spreads without a stop.

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 the bestselling book “Options as a Strategic Investment“.

Disclaimer: ©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.