MW The stock market is trying to break out - but the bulls can't catch a break

By Lawrence G. McMillan

S&P 500 is stuck in a trading range

The S&P 500 Index SPX fell back on Thursday in its attempt to confirm a new upside breakout. Earlier this week, the index had closed at a new all-time high for two days in a row - just as it did mid-January before lapsing into a trading range, creating what was a false upside breakout. Right now, not every market indicator is in agreement, but many of them are, so we are conditionally taking a new "core" long position.

A close below 6,100 would raise the possibility of a false breakout, but there is now support near 6,000. The S&P 500 has major support at the lower edge of the previous trading range, in the 5,870 area.

When the index makes new all-time highs, there is no overhead resistance per se, but we often use the +4 "modified Bollinger Band" as a target. That band is currently at 6,230, but the band can move, based on realized volatility and the price of SPX.

Equity-only put-call ratios are bullish, since they are steadily declining once again. There was some doubt about the standard ratio, but it has fallen in line. Both ratios are near the lower regions of their charts, indicating that they are overbought. However, in a strong breakout bull market, they could easily descend further as they did in late 2020 and during most of 2021.

Market breadth has been a bit of a problem. It is our most negative indicator. Even when SPX made a new all-time high for the second day (Feb. 19), breadth was negative in both NYSE and "stocks only" terms. That is not what we'd like to see with the index making new all-time highs. For the record, the NYSE-based breadth oscillator is still on a sell signal, while the "stocks only" breadth oscillator has rolled over to a weak buy signal.

VIX VIX flared on Thursday but generally has been subdued. Even during some fairly negative action in stocks (tariff announcements, CPI), VIX did not rise much. As a result, the "spike peak" buy signal is still in place. The trading system we built around these signals calls for holding the long position for another six trading days (unless stopped out by a VIX close above 22.51). There is no trend of VIX signal in place at this time, because as the circled area on the accompanying VIX chart shows, VIX and its 20-day and 200-day moving averages $(MA)$ are converged more or less together at this time.

The construct of volatility derivatives remains bullish for stocks, since the term structures of the VIX futures and of the Cboe volatility indices continue to slope upwards. The front-month VIX futures contract is now March, so we will be watching the price of that contract vis-à-vis the April VIX futures. If March should rise above April, that would be negative for stocks, but there is little danger of that happening right now.

In summary, we are once again entering a long "core" bullish position. However, we will take all new signals as they occur. Finally, we will continue to roll deeply in-the-money positions to take partial profits and reduce risk of a price reversal.

New recommendation: Conditional core bullish position

The two-day confirmation of the upside breakout by SPX would normally warrant a new long position, but SPX has already fallen back into the trading range. So, use this conditional approach:

If SPX closes above 6,130 on any day, then buy 1 SPY (Mar. 21) at-the-money call and sell 1 SPY (Mar. 21) call with a striking price 15 points higher.

If bought, stop out this position if SPX were to fall back inside the trading range. Specifically, stop out if SPX closes below 6,070 for two consecutive days.

Follow-up action:

All stops are mental closing stops unless otherwise noted.

We are using a standard rolling procedure for our SPY 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.

Also, for outright long options, roll if they become 8 points in-the-money.

Long 4 expiring WBA (Feb. 21) 12.5 calls: This is the "alternative" Dogs of the Dow position. The stock $(WBA)$ has been buoyed by positive earnings and takeover rumors (which surfaced again this week). In deference to those takeover rumors, roll to the WBA (March 14) 11 calls.

Long 1 SPY (Mar. 7) 603 call and short 1 SPY (Mar. 7) 623 call: This position was originally based on the latest "spike peak" buy signal of Dec. 19. It was subsequently rolled to this spread when the most recent "spike peak" buy signal occurred. If SPY trades at 611, or higher, roll only the long call, up to the SPY (March 7) 611 call.

Long 1 SPY (March 7) 607 call and short 1 SPY (March 7) 622 call: This position is based the "new highs vs. new lows" buy signal. This trade would be stopped out if, on the NYSE, new lows were to outnumber new highs for two consecutive days.

Long 1 SPY (March 21) 607 call and Long 1 SPY (March 21) 595 put: We originally bought a straddle, and then later rolled down the put. Continue to roll any option that becomes at least 8 points in the money. Sell the put now if SPX closes above 6,130 on any day going forward.

Long 2 FIS (April 17) 80 calls: After the poor earnings, the put-call ratio has rolled over to a sell signal. Sell these FIS $(FIS)$ calls if you can.

Long 2 ALL $(ALL)$ (March 21) 200 calls: We will hold these calls as long as the put-call ratio buy signal is in place.

Long 10 WEAT WEAT (March 21) 5 calls: We will hold these calls as long as the put-call ratio buy signal is in place.

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

(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

February 22, 2025 12:52 ET (17:52 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.