MW These positive stock-market indicators could rally the S&P 500 above 6,000

By Lawrence G. McMillan

The VIX is flashing a buy signal and there are increasing signs that the market is oversold - but oversold rallies can be short-lived

The S&P 500 Index SPX, after a false upside breakout a couple of weeks ago, has retraced its entire trading range and landed in a general support area between 5,770 and 5,870. There is another support area at 5,670, dating all the way back to last summer (see the lowest horizontal red line on the accompanying SPX chart). As this has happened, some extreme oversold conditions have arisen. One of our favorite sayings is, "Oversold does not mean buy." We prefer to wait for confirmed buy signals before jumping in front of the oversold freight train. However, those buy signals are being confirmed (at least some of them) and others are not far away.

The S&P 500 faces upside resistance near 6,000, which is where the declining 20-day moving average $(MA)$ is, and of course, resistance exists at the top of the trading range: 6,100-6,140. Oversold rallies often carry back up to about the level of the declining 20-day MA before failing again. In some cases - this being one of them - that distance can be substantial.

SPX has closed below its -4<SIGMA> "modified Bollinger band" twice this week. A "classic" buy signal is issued when SPX subsequently closes above the -3<SIGMA> band. We don't trade those "classic" signals because there have been too many whipsaws in the past. We prefer to wait for the further confirmation in price movement that is required to generate a McMillan volatility band $(MVB.AU)$ buy signal. SPX did register the "classic" buy signal at the close of trading on March 5. That MVB buy signal will occur if SPX trades at 5,900 or higher. It should be noted that if SPX closes back below the -4<SIGMA> band before the MVB buy signal is confirmed, then the whole process will have to begin again, and that 5,900-level buy signal would no longer be in effect.

Equity-only put-call ratios remain on the sell signals that were first generated less than two weeks ago. As long as they are rising, that is bearish for stocks. As you can see from the accompanying put-call ratio charts, these ratios are not all that high yet. Typically, they would rise toward at least the highs registered last summer before generating buy signals.

Market breadth had generally been very poor on the recent market decline. Both breadth oscillators had fallen into deeply oversold states. However, breadth was strongly positive on March 5 and that was enough to generate a new buy signal from the NYSE-based oscillator. The "stocks only" breadth oscillator still needs to see further improvement in breadth before it can generate a buy signal. Over the past two weeks, NYSE breadth has been superior to "stocks only" breadth, due in part to the fact that there are a number of inverse ETFs and ETNs that trade on the NYSE.

Another facet of breadth that we watch is the difference between the two oscillators. Because of the dominance of NYSE breadth over "stocks only" breadth, the two oscillators recently differed by a vast amount. They are now beginning to converge, and an oversold buy signal is imminent here, but has not yet been confirmed. This type of buy signal is usually just a short-term, one week signal, but it can be powerful.

On the NYSE, new lows continue to dominate new highs. This indicator generated a sell signal on Feb. 28. It would take two consecutive days on which new highs outnumbered new lows to stop out this sell signal.

VIX VIX has risen while the market has fallen. A trend of VIX sell signal (for stocks) is in effect because both VIX and its 20-day MA are above the 200-day MA of VIX. That will remain in place until VIX closes back below the 200-day MA. The signal is marked by a circle on the VIX chart below.

On a more positive note, VIX had also reached "spiking mode" while it was rising, and now a new "spike peak" buy signal has been generated as the close of trading on March 5. This buy signal will remain in effect for 22 trading days, but it would be stopped out if VIX were to close above its most recent high of 26.35.

The construct of volatility derivatives has become quite interesting during the past week. For the first time in a long while, the term structures have flattened out, and there has even been an inversion in the front end of the curve. An inverted term structure can be very negative for stocks, but so far the current inversion is only minor. This has also created some oversold conditions of its own, in that the nine-day VIX (VIX9D) is trading above all the other Cboe volatility indices. Also, VIX itself is trading above the three-month VIX (VIX3M). These are both oversold conditions that generate short-term (one-week) buy signals when they revert to their norms.

In summary, SPX is trying to hold above the lower edges of its trading range. It is currently in an oversold state that is beginning to generate buy signals. However, oversold rallies can be relatively short-lived.

New VIX 'spike peak' buy signal

VIX has been in "spiking" mode since Feb. 25 and has finally confirmed a "spike peak" buy signal as of the close of trading on March 5. Specifically, that buy signal took place when VIX closed at 21.93 on March 5, more than 3.0 points below its most recent peak of 26.35, which VIX reached on March 4.

Buy 1 SPY (April 17) at-the-money call and sell 1 SPY (April 17) call with a striking price 20 points higher.

This position would be stopped out if VIX were to close above that most recent peak of 26.35. Otherwise, by the rules of the trading system that we have built around these "spike peaks," we will hold for 22 trading days.

Potential oversold buy signal

A short-term buy signal will occur when VIX closes back below the three-month VIX (VIX3M). When that happens, it is a one-week buy signal for the broad stock market.

If VIX closes below VIX3M (the 3-month VIX), then buy 1 SPY (March 14) at-the-money call and sell 1 SPY (March 14) call with a striking price 15 points higher.

Exit the trade after a week. Roll both calls up if the lower call becomes eight points in-the-money or more.

Potential MVB buy signal

A new MVB buy signal will occur if SPX trades at 5,900 or higher. Since the last MVB buy signal (in August 2024) was so powerful, we are going to be ready in case this one occurs.

If SPX trades at 5,900 or higher, then buy 1 SPY (April 17) at-the-money call and sell 1 SPY (April 17) call with a striking price 20 points higher

If this position is taken, its target is for SPX to reach the +4<SIGMA> band. However, the buy signal would be stopped out if SPX were to subsequently close back below the -4<SIGMA> band.

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.

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

Long 4 WBA (Mar. 14) 11 calls: This is the "alternative" Dogs of the Dow position. WBA $(WBA)$ has been buoyed by takeover rumors again this week: supposedly Sycamore Partners is lining up financing for a bid slightly above $11 share. We are holding without a stop at this time.

Long 1 SPY SPY (March 7) 611 call and short 1 SPY (March 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, and the long call was rolled up on Feb. 20.

Long 1 SPY (March 21) 607 call and Long 1 SPY (March 21) 579 put: We originally bought a straddle, and then later rolled the put down. In line with instructions to continue to roll any option that becomes at least 8 points in the money, the 595 put was rolled to the 587 strike, and then later to the 579 strike - all in the March 21 expiration.

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.

Long 6 VIX (March 18) 24 calls: Continue to hold as VIX is now in an uptrend. Stop yourself out if VIX closes below its 200-day moving average for two consecutive days.

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

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March 06, 2025 16:03 ET (21:03 GMT)

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