A longstanding seasonal trade that has had excellent results over the years occurs at the end of October.

The trade doesn't work every year, but the setup is simple enough: Buy "the market" at the close of trading on Oct. 27 and exit the trade at the close of trading on Nov. 2 (since Nov. 2 is a Sunday this year, the trade would be exited at the close of trading on Nov. 3). We have traded this system for over 40 years, and it became evident that it works best when there is a large selloff sometime during October.

The reason that this seasonal trade "works" is that many institutional investors end their fiscal year on Oct. 31 and often buy at that time, especially if there is "too much" cash on their books. The only reason there would be excess cash would be that the market had fallen sharply sometime before that and they sold some stocks. By the end of the month they would be looking to get rid of that cash at the end of the fiscal year, and so be "properly" invested in stocks.

Specifically, we only take this trade if there has been at least a 3.2% decline - using closing prices - sometime during the month of October. This year, the highest close for SPX was 6,735 on Oct. 9. The next day it fell 2.7%, but it has rallied since. So there has not been a decline of 3.2% again this year. We will not take this seasonal trade if that continues to be the case.

But here is the contingent trade:

If SPX closes at 6,519 or lower on any day prior to and including Oct. 27, then at the close of trading on Oct. 27, enter this trade:

Buy 1 SPY (Nov. 14) at-the-money call and sell 1 SPY (Nov. 14) call with a striking price 15 points higher.

If the trade is entered, then exit the entire position at the close of trading on Nov. 3.

The S&P 500 index SPX has been more volatile since it experienced the large drop on Oct. 10, but it has recovered a great deal of those losses, and the SPX chart remains bullish. SPX has tested support in the 6,500-6,550 area five times since the middle of September, and it has held every time. So, regardless of what other indicators might be showing (and some are bearish), the SPX chart is the most important indicator at this time. A close below 6,500 would change the picture from bullish to bearish.

A McMillan volatility band (MVB) sell signal was confirmed on Oct. 10, when SPX fell below 6,680. But once again, there has not been any follow-through to that signal. It will remain in effect until it reaches either of the +/-4<SIGMA> bands, but those have spread far apart due to the increase in realized volatility that has taken place.

Equity-only put-call ratios are on sell signals as well, as they continue to rise from the recent lows. As long as these ratios are trending higher, that is a sell signal for stocks. Moreover, these sell signals are arising from deeply overbought conditions (i.e., the ratios were at or near the lows on their charts when they rolled over and began to rise). Such signals are normally the strongest ones.

Market breadth has been poor throughout the strong SPX rally since April. That is a nagging condition that some consider to be a negative divergence in the stock market. I'm not going that far, but one would normally expect to see the breadth oscillators at much higher levels after such a strong period for SPX. Regardless, the breadth oscillators are on buy signals at this time.

Cumulative volume breadth (CVB) is perhaps a better measure of how breadth is behaving in this market. It is the running daily sum of the volume on advancing stocks minus the volume on declining stocks. This measure has been strong and has kept pace with SPX on the upside. In fact, CVB made a new all-time high on both Oct. 15 and 16.

In general, volatility - both realized and implied - has been rising, and that is a negative for stocks. However, the big spike in volatility occurred last week (culminating with the Cboe Volatility Index VIX near 29 on Oct. 17 and then falling back sharply). So perhaps the brief spate of an explosion in volatility was just a short-lived phenomenon. In any case, the 20-day historical volatility of SPX (HV20) has continued to rise and is now at 14%. Since it is rising, it remains on a sell signal that occurred two weeks ago. If it were to fall back to 10% or lower, that would stop out the sell signal.

VIX threw a scare into the market with its behavior leading up to the sharp spike peak at 29. Not only did VIX jump sharply, but the associated trading instruments - futures and options - were in disarray as well. In the end, though, VIX pulled back sharply and created two new buy signals in doing so.

The first was a new "spike peak" buy signal on Oct. 17 as VIX closed at 20.78 after having been as high as 28.99 earlier in the day. That buy signal is marked with a green "B" on the accompanying VIX chart. This was soon followed by a new "trend of VIX" buy signal, when VIX continued to decline further and descended back below its 200-day moving average. This new buy signal is marked with a pink "B" on the chart. Note that there was a similar trend of VIX buy signal back in June, and that was a strong signal, which had only recently been stopped out.

When VIX shot higher, it caused a severe disturbance in the construct of volatility derivatives. The term structures of the VIX futures flattened out and even inverted sharply in the front end of the curve. At the close of trading on Oct. 16, the front-month October futures were trading 1.60 higher than the second-month November futures. By the morning of the next day, that differential had increased to over two points.

When the inversion is that great, it is usually a dire warning for stocks. But this time the damage to stocks was contained overnight, and everything pretty much went back to normal. Frankly, such a quick recovery has never really happened before, but I suppose it is just a further reflection on the short-term nature of markets today. In any case, the construct has returned to a bullish state for stocks, as the term structures slope upwards, and the VIX futures are trading at a premium to VIX (November VIX futures are now the front month, since October futures have expired).

In summary, the increase in volatility is worrisome, but as long as SPX remains above 6,500, there really isn't anything to worry about. Most of our indicators remain bullish, especially since there have been two recent buy signals added to the mix. Continue to roll deeply in-the-money options.

New recommendation: VIX 'spike peak' buy signal

On Oct. 13, VIX closed more than three points below its high of Oct. 10 (that peak was 22.44). This confirmed a new "spike peak" buy signal for the stock market. But just a few days later, on Oct. 16, VIX blasted to a higher high, stopping out that previous buy signal. That set up the possibility of another "spike peak" buy signal, which occurred on Oct. 17 when VIX traded up to 28.99 but closed much lower, at 20.78. That buy signal is still in effect, so:

Buy 1 SPY SPY (Nov. 28) at-the-money call and sell 1 SPY (Nov. 28) call with a striking price 15 points higher.

Stop out if VIX closes above 28.99 on any day. Otherwise, we will hold for 22 trading days. Roll up if SPY trades at the higher strike.

New recommendation: Boston Scientific $(BSX)$

There has been a new weighted put-call ratio buy signal in Boston Scientific Corp. (BSX).

Buy 2 BSX (Dec. 19) 100 calls at a price of 6.50 or less.

We will hold these calls as long as the weighted put-call ratio for BSX remains 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 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 2 APH $(APH)$ (Nov. 21) 130 calls: The stock briefly jumped higher on Amphenol Corp.'s Oct. 22 earnings report but quickly gave back those gains. Use a trailing closing stop at 124 for these calls.

Long 1 TSEM $(TSEM)$ (Nov. 17) 75 call and short 1 TSEM (Nov. 21) 85 call: Set a trailing, close stop at 69 for this spread.

Long 1 SPY SPY (Oct. 31) 672 call and sell 1 SPY (Oct. 31) 687 call: We will hold until new lows outnumber new highs on two consecutive days on the New York Stock Exchange.

Long 4 ATAI $(ATAI)$ (Nov. 21) 6 calls: Use a trailing closing stop at 5.20 for these calls.

Long 1 GLD (Nov. 21) 400 call and short 1 GLD (Nov. 21) 415 call: This spread was rolled up twice this past week. Once, when SPDR Gold Shares GLD traded at 385 on Oct. 15, and then again when it traded at 400 on Oct. 20. Raise the closing, trailing stop to 371 for this spread.

Long 2 NKE (Nov. 21) 72.5 puts: We will hold these as long as the weighted put-call ratio for Nike Inc. $(NKE)$ is on a sell signal.

Long 6 BITF (BITF) (Nov. 21) 5.5 calls: Sell these calls now, since Bitfarms Ltd.'s stock has pulled back too far.

Long 0 ASTS (Nov. 21) 100 call and short 0 ASTS (Nov. 21) 120 call: This spread was stopped out when AST SpaceMobile Inc. $(ASTS)$ closed below 72 on Oct. 22.

Long 10 CANE CANE (Nov. 21) 10 calls: We will hold as long as the put-call ratio for sugar futures remains on a buy signal.

Long 1 SPY (Nov. 21) 665 put and short 1 SPY (Nov. 21) 615 put: This is the position based on the MVB sell signal. It was confirmed on Oct. 13, when SPX fell below 6,680. Continue to hold until SPX touches either of the +/-4<SIGMA> bands.