Opinion: Technical trading signals in the stock market are about to turn bullish

The stock market, as measured by the S&P 500 SPX Index,
+ 0.71%,
got off to a rough start this week. But it produced a sufficient oversold condition for buyers to step in and push the benchmark down to the top of its trading range, at 4,700 points.

The lower end of the trading range is 4,500 (see chart below), although there is also support at this week’s low of 4530. SPX has tried on several occasions to break above 4705 and move beyond keep those gains, but could not do so. so. But the insiders of the market have improved somewhat, so maybe they will this time around.

The extreme volatility that was displayed in the trading range pushed SPX’s 20-day historical volatility (HV20) to a historically high level of 21%. This is a sell signal in itself. It is only if this volatility starts to recede (below 15%, say) that this sell signal will end.

Stock-only ratios continued to rise – until yesterday (Dec 22sd), when they peaked a bit. However, our computer analysis programs continue to “say” that these ratios correspond to a sell signal. Obviously, they’re pretty high in their rankings which means they’re oversold.

So a potential buy signal exists, but we have to see them start to go down (and for computer analysis programs to agree) before we can say they are on buy signals.

The size of the market was appalling when the market was going down. But it has recovered strongly with the rally since Monday, and now both width oscillators are on buy signals. We had a conditional bullish spread recommendation in place and these contingencies have been met.

These oscillators had reached extreme oversold conditions in late November and early December – extremes not seen since the March 2020 pandemic sell-off. This sets the stage for a strong buy signal, and it’s usually the second of its kind that is the “real” buy signal. This current signal is this second, so it’s promising for the bulls. For the record, the cumulative the width indicators are far from their old highs.

The new 52 week lows continued to outnumber the new 52 week highs, even with the market rebounding this week. This situation could be reversed in the coming week, but so far it has not. This means that this indicator is still hanging on to a sell signal. In a broad sense, it’s not a constructive thing for SPX to be fair at its highs, yet there are more stocks making new 52 week lows than making new 52 week highs.

The implied volatility indicators are mostly bullish, but not totally. First, the VIX’s “peak” buy signal remains in effect. The action was wild in VIX, however, as it exploded above 27, then closed below 23 one day (Monday, December 20e).

It’s the tendency of VIX which is sort of a problem. That is, VIX continued to close above its 200 day moving average, which is just below 19 and goes sideways. VIX almost fell to this level for the first time in a month (note the sidebar on the attached VIX chart). A clear close below this 200 day MA will be another bullish sign for stocks.

the construction volatility derivatives remained the most bullish indicator of any we track. Namely, month one VIX futures continued to close at a lower price than month two VIX futures, and the futures structures of VIX futures and CBOE volatility indices continued to rise. . The December VIX futures contracts have expired, so January is now the first month. Therefore, we will be watching the price comparison between January (first month) and February (second month). Right now, the Fed is trading at 1.70 above January – a bullish distance, of course.

One last point: seasonality is in favor of bulls. Yes, that must have been true from Thanksgiving until now, but it wasn’t.

So maybe we could take Santa’s next rally period with a grain of salt, but it’s normally positive for stocks. As noted by the late Yale Hirsch, Santa’s gathering period spans the last five trading days of one year and the first two of the next. Therefore, this period begins with tonight’s close (Thursday 23 Decembere). If this seven day period does not not produce a positive movement in SPX, then problems often lie ahead. Or, as Yale put it, “If Santa Claus didn’t call, the bears could come to Broad and Wall.

In summary, with SPX still in this trading range, we are not carrying a core position. A clear breakout to new closing and intraday highs would like However, this results in a “core” long position, and it’s probably closer to happening now than at any time in the past month.

I say this because of improving market internals: Stock-only ratios, width oscillators, and new highs versus new lows are on or approaching buy signals. But, still, SPX has to prove it. Either way, we will trade confirmed signals back and forth, as they occur.

New recommendation: Santa Claus rally

Even though we have seasonal trade in place, we’re going to take a bullish stance for the potential Santa rally:

Near market close today, December 23e,

Buy 2 SPY Jan (7e) 469 calls online with the market.

Sell ​​half of this position if SPY trades to 474 at any time. We will sell any remaining calls at the close of trading on the second trading day of the new year – Tuesday January 4the.

New recommendation: potential breakout to the upside

We have a ‘high-end’ position in place and part of its trailing action is to stop and reverse a long bullish spread if SPX closes above 4712. If you don’t that position in place, then you can still establish it now, since SPX is at the top of the trading range for the umpteenth time. In all cases,

IF SPX closes above 4712 any day,

THEN Buy 2 SPY Jan (21st) money calls

And sell 2 SPY Jan (21st) calls with a striking price of 10 more points.

New recommendation: Arena Pharmaceuticals

and Arena ARNA,
+ 0.45%
accepted the purchase of ARNA for $ 100 cash. The deal is expected to close in the first half of 2022 and PFE is funding the deal with its own cash. Still, there is a wide gap here of almost 10 points (ARNA closed at 90.73 yesterday).

Buy 2 ARNA Feb (18e) 90 calls

At a price of 3.00 or less.

ARNAL 90.73 Feb (18e) 90 calls: 2.20 offers, 3.20 offers

Follow-up actions:

All stops are mental shutdown stops, unless otherwise noted.

Long 1 SPY Dec (31st) 469 put and Short 1 SPY Dec (31st) 449 put: this spread was bought in accordance with put-call ratio sell signals only on equities. This trade will be stopped if the ratios start to fall again. Ratios have paused (see comment above), but have yet to switch to sell signals. We will monitor the situation and report it weekly.

Long 2 CMS expiring January 21st) 65 calls: this purchase is based on the weighted put-call ratio buy signal in CMS, and this buy signal remains in effect.

Long 3 IWM Jan (21st) 232 calls: this is the end of the year seasonal bullish trade that is off to a bad start. For now, just keep holding on.

Long 2 EXC Jan (21st) 55 places: hold as long as the weighted the put-call ratio is on a sell signal.

Long 1 SPY Dec (31st) 468 puts and Short 1 SPY Dec (31st) 448 stakes: this is our “trading range” spread. We took profit on half of this trade when SPX traded below 4600 at the open on December 20th.e.

Meanwhile, use the following as “stop and reverse” if SPX goes up:

IF SPX closes above 4712 any day,

THEN Sell ​​the above and instead spread

Buy 2 SPY Jan (21st) money calls

And sell 2 SPY Jan (21st) calls with a striking price of 10 more points.

Long 1 IWM Jan (7e) call for courses: this was bought in accordance with several buy signals that were in effect and are in effect again: (VIX “peak peak”, “oscillator differential” and width oscillators). Keep holding on without stopping.

Long Jan 2 EMN (21st) 120: keep going as these takeover rumors unfold.

Long 1 ESPION (Jan 7)e) 467 call and Short 1 SPY Jan (7e) 477 call: this was purchased online with the width oscillator buy signal on December 22sd. The criteria we specified in last week’s report for a buy signal were met on that date. We will hold as long as this buy signal is in effect. We will update the situation weekly.

Send your questions to: [email protected]

Lawrence G. McMillan is President of McMillan Analysis, a Certified Commodity Investment and Trading Advisor. McMillan may hold positions in the securities recommended in this report, both personally and in accounts receivable. He is an experienced trader and fund manager and is the author of the bestselling book, Options as a Strategic Investment.

© McMillan Analysis Corporation is registered with the SEC as an investment advisor and with the CFTC as a commodities trading advisor. The information in this bulletin has been carefully compiled from sources believed to be reliable, but its accuracy and completeness are not guaranteed. Officers or directors of McMillan Analysis Corporation, or accounts managed by such persons may hold positions in the securities recommended in the notice.

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