MW The stock market is looking oversold as earnings season gets underway

By Lawrence G. McMillan

Amazon and Roku earnings next week could be solid trading opportunities

The S&P 500 index SPX chart continues to show a pattern of lower highs and lower lows, which is a downtrend and a bearish sign. Still, the broad market remains oversold in many aspects, and the bulls are trying to find a foothold. That will only come with more substantial buy signals - which are possible but haven't shown up yet.

The SPX lows were established in the 4,850-4,950 area a couple weeks ago, and that is support. But the oversold rally that has taken place since has not been particularly robust so far. It finally reached the declining 20-day moving average $(MA)$ on April 23, but that might be due as much to the fact that the moving average is declining as it is to the fact that SPX is rallying.

From the SPX chart below, you can see that several days in the past couple of weeks have peaked just short of the 5,500 level (lower horizontal blue line on the graph). That is the first level of resistance. Moreover, the downtrend line is near that area as well. Oversold rallies typically overshoot the 20-day MA by a modest amount, but not this time so far.

If SPX can keep climbing, a McMillan Volatility Band $(MVB.AU)$ buy signal would be generated by a close above 5,575. Even so, there is further overhead resistance, including the now-declining 200-day MA at 5,750. If SPX were to rise above 5,800, that would be extremely bullish and we would no longer consider the SPX chart bearish.

Short of that, though, this is a bearish chart. A breakout above the current downtrend line would not be a sign to turn heavily bullish. The pattern of lower highs would still be in place.

Equity-only put-call ratios remain split in their outlook for the broad market. The standard ratio is slightly below its peak earlier this week, but the computer programs that we use to analyze these charts currently put the odds of a peak (i.e., the odds of a stock-market buy signal) at slightly below 50%. The weighted ratio has remained below its most recent peak and is on a buy signal. We will not consider this general area of equity-only put-call ratios to be bullish until both ratios are solidly on buy signals.

Read: NYSE's most famous trader uses these chart indicators to navigate what he calls 'economic terrorism'

Market breadth has shown solid improvement this past week, and both breadth oscillators are now on buy signals. This is the second of our indicators to generate a buy signal, and although these oscillator signals are often subject to whipsaws, it should be respected since both oscillators were so deeply oversold earlier this month.

New lows on the NYSE have diminished in number by a large amount. In fact, they have been exceeded by new highs for the past two days. That is enough to stop out the previous sell signal from this indicator. Note that it is not on a buy signal now, but has returned to a neutral status. The next signal will occur when either new highs or new lows register more than 100 issues for two consecutive days. This latest sell signal emerged at the close on March 31 and was stopped out at the close on April 23 - a solid gain in terms of SPX points.

Volatility remains an interesting and strong component of this market. The VIX VIX "spike peak" buy signal that was generated on April 7 remains in place. It lasts for 22 trading days unless stopped out. At the same time, the trend of VIX sell signal that began back in late February is intact as well. That would be terminated if VIX were to fall and close below its 200-day moving average, which is currently just above 19.

The construct of volatility derivatives remains stubbornly bearish in its outlook for stocks. Despite a huge stock-market rally this week, the term structures remain downward sloping, and VIX futures continue to trade at a discount to VIX itself. Those are bearish signs. The same is true for the Cboe Volatility Index. Eventually, these term structures will begin to slope upward again, and that will be bullish for stocks. However, this current spate of a negative slope in the term structure is the most persistent since March 2020. It essentially means that volatility traders are still skeptical about the market.

In summary, we are keeping our core bearish position, mainly because of the negative nature of the SPX chart. We will trade any other signals that are confirmed, though. Continue to roll deeply in-the-money options.

Trading Amazon and Roku earnings

It's earnings season, and next week is a big reporting period for many U.S. companies. Two stocks that have had substantial moves postearnings on a consistent basis are Amazon.com $(AMZN)$ and Roku $(ROKU)$. Both companies are reporting earnings after the close on Thursday, May 1.

So, on May 1, just before the close of trading, buy the at-the-money straddle, expiring on May 2. The saw-toothed implied volatility pattern as shown in the AMZN chart below is indicative of option traders buying straddles in anticipation of past earnings reports, expecting - and often getting - large postearnings moves.

AMZN: Pay no more than 6.8% of the current stock price

ROKU: Pay no more than 14.1% of the current stock price

If either straddle is bought, then use these instructions for follow-up action after the earnings announcement.

At the open on the day following the earnings report:

1) Let the stock gap and trade for an hour. At that time, if it is within the previous day's trading range, then sell the straddle and take the loss.

2) Otherwise, if the stock trades back into its opening gap at any time during the day, then sell the straddle.

3) Finally, if neither condition 1 nor 2 occurs, then sell the (hopefully profitable) straddle just before the close of trading.

Market breadth sends a buy signal

The market-breadth oscillators have both rolled over to buy signals. So we want to take a position in line with that.

Buy 1 SPY SPY (May 16) at-the-money call and sell 1 SPY (May 16) call with a striking price 20 points higher.

We will hold without a stop. If breadth oscillators turn negative again, we will exit this position.

Potential oversold buy signal

As noted above, VIX (a 30-day volatility measure) has been trading higher than the three-month VIX (VIX3M). This is an unusual situation that means the market is oversold (among other things). When this reverts to "normal," with VIX back below VIX3M, then that is an oversold buy signal for stocks.

If VIX closes at least 0.50 below VIX3M, then buy 1 SPY (May 9) at-the-money call and sell 1 SPY (May 9) call with a striking price 15 points higher.

If the position is established, it should be held for five trading days only and then exited. Roll both sides of the spread up if SPY rises to 10 points above your lower strike, remaining in the May 2 expiration.

Potential MVB buy signal

A "classic" buy signal has occurred because SPX first closed below the -4<SIGMA> "modified Bollinger band," and then closed above the -3<SIGMA> band. We don't trade those, preferring to wait for further price confirmation in the form of a McMillan Volatility Band (MVB) buy signal.

If SPX closes above 5,575, then buy 1 SPY (June 20) at-the-money call and sell 1 SPY (June 20) call with a striking price 25 points higher.

This is an intermediate-term buy signal. If it takes place, then the target would be the upper +4<SIGMA> band. The trade would be stopped out if SPX retreats and once again closes below the -4<SIGMA> band.

Follow-up action:

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.

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

Long 1 SPY (May 9) 480 put: We originally bought a straddle, and then later rolled the put down repeatedly according to the above instructions until it landed in the put shown. Hold without a stop.

Long 2 APH (May 16) 65 calls: We will hold as long as the weighted put-call ratio for APH $(APH)$ remains on a buy signal.

Long 8 IEF IEF (May 16) 94 puts: We will hold this position as long as the weighted put-call ratio for U.S. Treasury notes remains on a sell signal.

Long 1 SPY (June 20) 485 put and Short 1 SPY (June 20) 435 put: This is the "core" bearish position, bought near the close of April 3, when SPX was well below 5,480. It was rolled down once. Stop out of this position if SPX were to reverse and close above 5,700.

Long 1 SPY (May 2) 485 put and short 1 SPY (May 2) 455: This is based on the "new highs vs. new lows" sell signal. The position was stopped out on April 23, since new highs outnumbered new lows for two days in a row.

Long SPY (May 16) 534 call and short 1 SPY (May 16) 564 call: This is the VIX "spike peak" buy signal. It was rolled up once. This position will be held for 22 trading days. It would be stopped out if VIX were to subsequently close above its most recent peak of 60.13.

Long 1 TSEM (July 18) 34 call and long 1 TSEM (July 18) 34 put: Plan to roll either option if it becomes at least 8 points in-the-money. For example, if TSEM $(TSEM)$ trades up to $42, then roll to the TSEM (July 18) 42 call. Similarly, roll down if TSEM trades at $26. We will not carry this to expiration, as we will stop ourselves out if the straddle price falls below $4.

All stops are mental closing stops unless otherwise noted.

Send questions to: lmcmillan@optionstrategist.com.

MW The stock market is looking oversold as earnings season gets underway

By Lawrence G. McMillan

Amazon and Roku earnings next week could be solid trading opportunities

The S&P 500 index SPX chart continues to show a pattern of lower highs and lower lows, which is a downtrend and a bearish sign. Still, the broad market remains oversold in many aspects, and the bulls are trying to find a foothold. That will only come with more substantial buy signals - which are possible but haven't shown up yet.

The SPX lows were established in the 4,850-4,950 area a couple weeks ago, and that is support. But the oversold rally that has taken place since has not been particularly robust so far. It finally reached the declining 20-day moving average (MA) on April 23, but that might be due as much to the fact that the moving average is declining as it is to the fact that SPX is rallying.

From the SPX chart below, you can see that several days in the past couple of weeks have peaked just short of the 5,500 level (lower horizontal blue line on the graph). That is the first level of resistance. Moreover, the downtrend line is near that area as well. Oversold rallies typically overshoot the 20-day MA by a modest amount, but not this time so far.

If SPX can keep climbing, a McMillan Volatility Band (MVB) buy signal would be generated by a close above 5,575. Even so, there is further overhead resistance, including the now-declining 200-day MA at 5,750. If SPX were to rise above 5,800, that would be extremely bullish and we would no longer consider the SPX chart bearish.

Short of that, though, this is a bearish chart. A breakout above the current downtrend line would not be a sign to turn heavily bullish. The pattern of lower highs would still be in place.

Equity-only put-call ratios remain split in their outlook for the broad market. The standard ratio is slightly below its peak earlier this week, but the computer programs that we use to analyze these charts currently put the odds of a peak (i.e., the odds of a stock-market buy signal) at slightly below 50%. The weighted ratio has remained below its most recent peak and is on a buy signal. We will not consider this general area of equity-only put-call ratios to be bullish until both ratios are solidly on buy signals.

Read: NYSE's most famous trader uses these chart indicators to navigate what he calls 'economic terrorism'

Market breadth has shown solid improvement this past week, and both breadth oscillators are now on buy signals. This is the second of our indicators to generate a buy signal, and although these oscillator signals are often subject to whipsaws, it should be respected since both oscillators were so deeply oversold earlier this month.

New lows on the NYSE have diminished in number by a large amount. In fact, they have been exceeded by new highs for the past two days. That is enough to stop out the previous sell signal from this indicator. Note that it is not on a buy signal now, but has returned to a neutral status. The next signal will occur when either new highs or new lows register more than 100 issues for two consecutive days. This latest sell signal emerged at the close on March 31 and was stopped out at the close on April 23 - a solid gain in terms of SPX points.

Volatility remains an interesting and strong component of this market. The VIX VIX "spike peak" buy signal that was generated on April 7 remains in place. It lasts for 22 trading days unless stopped out. At the same time, the trend of VIX sell signal that began back in late February is intact as well. That would be terminated if VIX were to fall and close below its 200-day moving average, which is currently just above 19.

The construct of volatility derivatives remains stubbornly bearish in its outlook for stocks. Despite a huge stock-market rally this week, the term structures remain downward sloping, and VIX futures continue to trade at a discount to VIX itself. Those are bearish signs. The same is true for the Cboe Volatility Index. Eventually, these term structures will begin to slope upward again, and that will be bullish for stocks. However, this current spate of a negative slope in the term structure is the most persistent since March 2020. It essentially means that volatility traders are still skeptical about the market.

In summary, we are keeping our core bearish position, mainly because of the negative nature of the SPX chart. We will trade any other signals that are confirmed, though. Continue to roll deeply in-the-money options.

Trading Amazon and Roku earnings

It's earnings season, and next week is a big reporting period for many U.S. companies. Two stocks that have had substantial moves postearnings on a consistent basis are Amazon.com $(AMZN.UK)$ and Roku (ROKU). Both companies are reporting earnings after the close on Thursday, May 1.

So, on May 1, just before the close of trading, buy the at-the-money straddle, expiring on May 2. The saw-toothed implied volatility pattern as shown in the AMZN chart below is indicative of option traders buying straddles in anticipation of past earnings reports, expecting - and often getting - large postearnings moves.

AMZN: Pay no more than 6.8% of the current stock price

ROKU: Pay no more than 14.1% of the current stock price

If either straddle is bought, then use these instructions for follow-up action after the earnings announcement.

At the open on the day following the earnings report:

1) Let the stock gap and trade for an hour. At that time, if it is within the previous day's trading range, then sell the straddle and take the loss.

2) Otherwise, if the stock trades back into its opening gap at any time during the day, then sell the straddle.

3) Finally, if neither condition 1 nor 2 occurs, then sell the (hopefully profitable) straddle just before the close of trading.

Market breadth sends a buy signal

The market-breadth oscillators have both rolled over to buy signals. So we want to take a position in line with that.

Buy 1 SPY SPY (May 16) at-the-money call and sell 1 SPY (May 16) call with a striking price 20 points higher.

We will hold without a stop. If breadth oscillators turn negative again, we will exit this position.

Potential oversold buy signal

As noted above, VIX (a 30-day volatility measure) has been trading higher than the three-month VIX (VIX3M). This is an unusual situation that means the market is oversold (among other things). When this reverts to "normal," with VIX back below VIX3M, then that is an oversold buy signal for stocks.

If VIX closes at least 0.50 below VIX3M, then buy 1 SPY (May 9) at-the-money call and sell 1 SPY (May 9) call with a striking price 15 points higher.

If the position is established, it should be held for five trading days only and then exited. Roll both sides of the spread up if SPY rises to 10 points above your lower strike, remaining in the May 2 expiration.

Potential MVB buy signal

A "classic" buy signal has occurred because SPX first closed below the -4<SIGMA> "modified Bollinger band," and then closed above the -3<SIGMA> band. We don't trade those, preferring to wait for further price confirmation in the form of a McMillan Volatility Band (MVB) buy signal.

If SPX closes above 5,575, then buy 1 SPY (June 20) at-the-money call and sell 1 SPY (June 20) call with a striking price 25 points higher.

This is an intermediate-term buy signal. If it takes place, then the target would be the upper +4<SIGMA> band. The trade would be stopped out if SPX retreats and once again closes below the -4<SIGMA> band.

Follow-up action:

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.

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

Long 1 SPY (May 9) 480 put: We originally bought a straddle, and then later rolled the put down repeatedly according to the above instructions until it landed in the put shown. Hold without a stop.

Long 2 APH (May 16) 65 calls: We will hold as long as the weighted put-call ratio for APH $(APH.UK)$ remains on a buy signal.

Long 8 IEF IEF (May 16) 94 puts: We will hold this position as long as the weighted put-call ratio for U.S. Treasury notes remains on a sell signal.

Long 1 SPY (June 20) 485 put and Short 1 SPY (June 20) 435 put: This is the "core" bearish position, bought near the close of April 3, when SPX was well below 5,480. It was rolled down once. Stop out of this position if SPX were to reverse and close above 5,700.

Long 1 SPY (May 2) 485 put and short 1 SPY (May 2) 455: This is based on the "new highs vs. new lows" sell signal. The position was stopped out on April 23, since new highs outnumbered new lows for two days in a row.

Long SPY (May 16) 534 call and short 1 SPY (May 16) 564 call: This is the VIX "spike peak" buy signal. It was rolled up once. This position will be held for 22 trading days. It would be stopped out if VIX were to subsequently close above its most recent peak of 60.13.

Long 1 TSEM (July 18) 34 call and long 1 TSEM (July 18) 34 put: Plan to roll either option if it becomes at least 8 points in-the-money. For example, if TSEM (TSEM) trades up to $42, then roll to the TSEM (July 18) 42 call. Similarly, roll down if TSEM trades at $26. We will not carry this to expiration, as we will stop ourselves out if the straddle price falls below $4.

All stops are mental closing stops unless otherwise noted.

Send questions to: lmcmillan@optionstrategist.com.

(MORE TO FOLLOW) Dow Jones Newswires

April 24, 2025 14:15 ET (18:15 GMT)

MW The stock market is looking oversold as -2-

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.

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April 24, 2025 14:15 ET (18:15 GMT)

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