MW Bulls facing a 'make-or-break' moment as the S&P 500 nears a line in the sand

By Lawrence G. McMillan

Expect more downside if the benchmark index slides below 6,720

The selling in the S&P 500 index SPX has been more evident in the biggest stocks than across the broader market, and market internals are still relatively strong. But they won't be able to stand up against a full-fledged SPX breakdown.

A key support level at 6,800 (the January lows) was broken on Thursday. The next support is at 6,720 (last December's lows), which is critical for the bullish camp. A close below 6,720 would be extremely negative.

Stock-market breadth has confirmed a sell signal. This is our shortest-term indicator and is thus subject to whipsaws, but it is negative now.

New highs on the NYSE continue to completely dominate new lows. There were more than 300 new 52-week highs on Feb. 4. So, this indicator remains bullish and will continue to do so unless new lows outnumber new highs on the NYSE for two consecutive days.

The market's equity-only put-call ratios are split. The standard ratio has curled upward and is now on a sell signal. However, the weighted ratio remains on a buy signal - for now.

Perhaps the greatest shift is taking place in volatility. The Cboe Volatility Index VIX has begun to rise - a higher VIX is generally unwelcome news for stocks. VIX has now closed above its 200-day moving average for the past two trading days; that is enough to stop out the trend of VIX buy signal that was in place.

This change is noted on the accompanying VIX chart. Meanwhile, the "spike peak" buy signal of Jan. 21 has been stopped out - as VIX is now in "spiking" mode, closing Feb. 5 at 21.77.

The construct of volatility derivatives has remained bullish, even with VIX rising. That is, the term structures of the VIX futures and of the Cboe volatility indices have continued to slope upwards. The first sign of potential problems would be if the front-month February VIX futures began to trade at a significantly higher price than March VIX futures. That hasn't happened, so far. However, one negative aspect is that the VIX futures are beginning to trade at a discount to VIX, and that can become a bearish factor if it persists.

The bears are trying to take control - and if the S&P 500 breaks the critical 6,720 support (the December low), they will have succeeded. Meanwhile, we will take positions in line with individual indicators as they occur and will continue to roll deeply in-the-money options.

If SPX closes below 6,720, then Buy 1 SPY SPY (March 20) at-the-money put and Sell 1 SPY (March 20) put with a striking price 40 points lower.

If this position is established, then it would be stopped out if SPX were to move above 6,840.

Cisco Systems $(CSCO)$ shows strength

One stock to watch now is Cisco Systems (CSCO), which is due to report earnings on Wednesday, Feb. 11, after the market closes.

Based on the past 10 earnings reports, CSCO moves about 3% the day after its earnings announcement. The CSCO straddle recently was priced at about 6% of the stock price, indicating that the option market is expecting a big move by CSCO after the earnings. That seems to be in line with the stock's recent rally.

In addition, call volume has increased heavily this week so far, while put volume has remained steady. This could be interpreted as a positive prediction for CSCO's earnings. It should also be noted that CSCO just recently broke though all-time highs set in March 2000.

Taking all of this together, we are going to make a speculative recommendation to buy CSCO calls:

Buy 2 CSCO (March 20) 82.5 calls in line with the market.

We will hold without a stop while we wait to see what the postearnings move looks like.

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 TSEM (Feb. 20) 140 call and short 1 TSEM (Feb. 20) 155 call: Continue to hold without a stop for now. TSEM $(TSEM)$ dropped precipitously on Feb. 4, but announced positive news on Feb. 5.

Long 1 SPY (Feb. 20) 686 call and short 1 SPY (Feb. 20) 706 call: This position is the trend of VIX buy signal. VIX has now closed above its 200-day moving average for two consecutive days, so sell this spread now.

Long 1 BMO (June 18) 130 call and long 1 BMO (June 18) 130 put: Continue to hold this straddle. Roll the calls up if BMO $(BMO)$ trades at 150 and roll the puts down if it trades at 110.

Long 6 AAL (Feb. 20) 15 puts: We will continue to hold as long as the AAL $(AAL)$ put-call ratio is on this sell signal.

Long 1 SPYM (Feb. 20) 81 call and long 1 SPYM (Feb. 20) 81 put: Roll the calls up to the 84 strike if SPYM SPYM trades at 84 or higher. Roll the puts down to the 78 strike if SPYM trades at 78 or lower.

Long 0 shares of BWEN: The position was stopped out on Jan. 27 when BWEN $(BWEN)$ closed below 3.15.

Long 1 LH (Feb. 20) 260 call: We will hold the call as long as the put-call ratio for LH $(LH)$ remains on a buy signal. Roll up to the LH (Feb. 20) 280 call now.

Long 3 ERAS (Feb. 20) 7.5 calls: Raise the closing stop for ERAS $(ERAS)$ to 9.10.

Long 0 METC (Mar. 20) 24 calls: These calls were stopped out when METC $(METC)$ closed below 20 on Jan. 29.

Long 0 SATL (Mar. 20) 5 calls: These calls were stopped out on Feb. 2, when SATL $(SATL)$ closed below 3.90.

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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February 05, 2026 17:51 ET (22:51 GMT)

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