MW Bulls beware: A volatile stock market like this one is dangerous and can easily turn

By Lawrence G. McMillan

What began as an oversold rally in early April is now generating some buy signals, but that doesn't mean all is bullish again

The S&P 500 index SPX is higher, but its movement is volatile. There has been some improvement in the SPX chart and a great deal more improvement in the internal indicators. So, what began as an oversold rally in early April has now progressed to the point of generating some intermediate-term buy signals.

Even so, that doesn't mean that all is bullish again. The SPX chart still has a bearish tone to it, and since the price of the market is the ultimate indicator, it must be respected.

The rally this week has penetrated through the downtrend line that connected the February and March highs. Overhead, there is steady resistance up to and including the declining 200-day moving average, which is at about 5,750. Only a close above 5,800 would change things for the positive.

As for support, there is a gap down to 5,300, then spike lows at 5,100 and 4,850. There is another spike low from the GDP-related trading on April 30, at 5,433, and that might represent short-term support as well.

A McMillan Volatility Band buy signal looks imminent. On April 9, SPX closed above the -3<SIGMA> modified Bollinger band. But we require further upside confirmation to generate the MVB buy signal. In this particular case, that would be a close above 5,775.

Equity-only put-call ratios have turned bullish as well. Both ratios peaked and are declining. These buy signals are confirmed by the computer programs that we use to analyze these charts. Since they are being generated with the ratios at or near the highs of their charts, they should be strong signals. These new buy signals would be stopped out if the ratios were to exceed their recent peaks.

Market breadth remains positive, and both of the breadth oscillators are on buy signals and in overbought territory. It is a positive sign when the breadth oscillators are overbought while SPX is beginning a new leg upward. It would take at least two days, and probably three, of negative breadth to roll these oscillators over to sell signals.

New highs barely outpace new lows on the New York Stock Exchange, and both are at extremely low levels. So this indicator remains in a neutral state. It will give the next signal when either new highs or new lows number more than 100 for two consecutive days on the NYSE.

Realized volatility continues to skyrocket, which is not positive for the stock market. A volatile market is generally a dangerous one and can easily turn bearish. Yet this doesn't seem to bother the bulls at the moment. The 20-day historical volatility of SPX continues to hover near a staggering 50%.

Implied volatility, on the other hand, continues to decline. The Cboe Volatility Index VIX is now below 25, and the "spike peak" buy signal that was issued on April 7 remains in place. It will last for 22 trading days, which takes it into next week. Meanwhile, the trend of VIX is still upward, and that is bearish in general. The trend of VIX sell signal would be stopped out if VIX were to close below its 200-day moving average for two consecutive days. That 200-day moving average is just above 19 now and is continuing to rise.

One aspect of the market that has remained stubbornly bearish all through the month of April is the construct of volatility derivatives. That is, the term structures of the VIX futures and of the Cboe volatility indices have continued to slope downward. In a bullish market, they would slope upward, but that hasn't happened yet. Even now, after a somewhat halting rally, the VIX futures term structure is flat to down. The Cboe index term structure is similar, although it is "bumpier." VIX itself closed below the 3-month VIX (VIX3M) on April 25, and that generated a short-term buy signal, which will expire on May 2.

In summary, we are maintaining an out-of-the-money "core" bearish position as long as the SPX chart is negative. On the other hand, we are trading confirmed signals around that. Finally, we will continue to roll deeply in-the-money options.

Equity-only put-call ratio buy signal

The equity-only put-call ratios have generated buy signals from a favorable position on their charts. These are normally intermediate-term signals in length, but in this case would be stopped out if the ratios were to exceed their recent highs.

Buy 1 SPY SPY (June 20) at-the-money call and sell 1 SPY (June 20) call with a striking price 30 points higher.

Since we expect this to be an intermediate-term signal, we are spreading the strikes even farther apart. We will update these charts weekly, and if either moves to a new high, this position would be stopped out.

Potential MVB buy signal

A "classic" buy signal has occurred because SPX first closed below the -4<SIGMA> modified Bollinger band, and then close 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 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.

Conditional call buy in Digital Realty Trust

A weighted put-call ratio buy signal has been registered in Digital Realty Trust (DLR), and we will buy calls if there is some price confirmation from the underlying. Specifically: If DLR closes above $162, then buy 2 DLR (June 20) 160 calls in line with the market.

As usual, if the calls are bought, we will hold as long as the DLR weighted put-call ratio is on a buy signal.

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 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 Amphenol $(APH)$ 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 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. Stop out if VIX closes above 30.50.

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 Tower Semiconductor $(TSEM)$ 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 out of the position if the straddle price falls below $4.

Long 1 SPY (May 16) 541 call and short 1 SPY (May 16) 561 call: This position is based on the breadth oscillator buy signal. We will hold without a stop and will update the status of the breadth oscillators weekly. If they turn negative again, we will exit this position. Currently, they remain on buy signals in overbought territory.

Long 1 SPY (May 9) 550 call and short 1 SPY (May 9) 565 call: This position is based on the "VIX crossover" trading system. It was established at the close of trading on April 25, when VIX closed more than 0.50 below VIX3M. Roll both sides of the spread up if SPY rises to 10 points above your lower strike, remaining in the May 9 expiration. Sell all positions at the close of trading on May 2.

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 the book, "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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May 01, 2025 14:08 ET (18:08 GMT)

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