Opinion: The stock market trend is relentlessly bearish, especially after this week’s big daily declines

The stock market crashed on September 13th when a monthly government report showed that inflation was spreading throughout the economy.

One might have thought that professional traders were expecting such a possibility, but the euphoria before the announcement was too much.

As a result, “everyone” tried to sell at once, and the S&P 500 SPX,
It sank, recording the fifth largest one-day drop in history. (The fourth largest event occurred earlier this year, and the top three were in March 2020 during the onset of the pandemic.)

This negative action left a so-called island inversion on the SPX chart. There is also an island reversal on the chart from mid-August. These are unusual formations on a broad-based indicator chart, and are usually negative. SPX has found support near 3900 points so far. If that is violated, 3800 is the next support level, with the yearly low at 3,637 providing support even less.

On a more positive note, the Macmillan Volatility Range (MVB) buy signal was confirmed on September 9th. They are marked with the green letter “B” on the accompanying SPX chart above. Its target is above +4σ “Modified Bollinger Band” (mBB), which is currently over 4300. The MVB buy signal will be stopped at a close below the -4σ band, which is rapidly declining at the moment.

Only buy ratios for stocks remain in sell signals, as they continue to rise. As long as these ratios are on the rise, that is considered negative for the stock market. It is interesting to note that the recent rally in the stock market – at the beginning of September – was also Not It records a significant decrease, if any, in these ratios. That is, traders are still buying short positions despite the rally.

Market breadth has seen some huge days in both directions lately. Breadth numbers were quite strong at the beginning of this month, and therefore both oscillators are generating buy signals. With that said, the day of the big drop on September 13th was a “90% down day”, which brought the “stocks only” oscillator back into a sell signal. Technically, the NYSE Breadth Oscillator is still in a buy signal as of September 15th, but another day of strong negative breadth will cancel that out.

The new 52-week highs on the NYSE are still very few in number, so this indicator remains a sell signal. It’s been bearish since early April, with very few stocks able to hit 52-week highs since then.

The indicator that was more positive than most of the others is VIX VIX,
+ 3.73%And the
30-day CBOE Volatility Index. I posted a couple of buy signals a week or so ago, but both have since been discontinued.

The first was the Sept 8 “peak rally” buy signal, but that was stopped on Sept 13, when VIX reverted to “sudden spike” mode. since VIX resident In bullish mode, a new “peak high” buy signal will be issued soon. Specifically, it will happen when VIX Close At least 3.00 pips below the highest price reached while in Rapid Rise mode. So far, this high was at 28.15 on September 13th. If the VIX does not hit a higher price today, a close at or below 25.15 will generate a new “peak up” buy signal.

In addition, when the VIX rose earlier this week and held its gains, it stalled direction From VIX buy signal. It happened when VIX closed above its 200 day moving average which is still rising for two consecutive days. This is it Not a direction From a VIX sell signal, however, it would require that the 20 day EMA for VIX also cross above the 200 day EMA. The 20 day indicator is moving higher, but it is still more than a point below the 200 day mark.

The Building Derivatives volatility remains in a modestly positive state for equities. There has been a slight reversal of the term structure on the front end – both in VIX futures and in CBOE volatility indices – but that was only temporary.

In short, the SPX trend is still down, and that’s what defines a bear market (not the arbitrary 20% number alleged by the media). Therefore, we maintain a bearish “core” position. We will be trading other signals around this “basic” situation as confirmed.

New Recommendation: VIX Possible ‘Peak High’ Buy Signal

As shown above, another “peak up” buy signal will be confirmed soon. This indicator has had some small losses lately, but its long-term track record is excellent, so we won’t “skip” any signal.

If VIX Close less than 25.15,

Then buy 1 SPY Oct (21Street) at-the-money call

And sell 1 October spy (21StreetCall an amazing 15 pips higher price.

If established, stop yourself if VIX Close above 28.15.

New recommendation: SPY straddle buy

The S&P 500 is near the support level at 3900. It could register another oversold bounce from there, or, conversely, if it collapses below there, a sharper drop could occur in the market. Therefore, buying near term near the 3900 level appears to be a reasonable options strategy. The most volatile market moves usually occur in September and October, so we will mark the expiration date for this correlative buy near the end of October:

Buy 1 SPY Oct (28The tenth) at-the-money call

Buy 1 SPY Oct (28The tenth) in the money

As a follow-up measure, if SPY trades 25 pips above your strike, roll the call strike by 25 pips. Similarly, if SPY trades 25 pips lower than your strike, roll the sell strike down 25 pips.

Follow the movement:

All breakpoints are mental breakpoints unless otherwise noted.

We use a ‘standard’ trading procedure for our SPY spread: in any vertical bull or bear spread, if the underlying hits the short, roll the entire spread. That will be a roll above In the event of a bull call spread or roll lowest In the event of the spread of bears. Stay at the same expiration, and keep the distance between strokes the same unless otherwise instructed.

Long 10 CRNT Expires in September (16The tenth2.5 calls: Aviat Networks (AVNW) Bid $3.08 for CRNT, but CRNT isn’t interested in selling. We will not invest any more money in this position, so let these calls expire and not replace them.

Long 3 MRO October (21Street24 calls: We will hold this position as long as the MRO buy to buy ratio remains a buy signal.

Long 1 SPY Oct (21Street) 396 put and short 1 spy october (21Street) 366 put: This is our “basic” bearish position. It was reduced by 30 pips per strike, with SPY trading at 396 this week (according to the general “rolling over” rule mentioned above). There is no stopping this position at this time.

Long 2 SGEN expires in September (16The tenth) 170 calls and Short 2 SGEN Sept (16The tenth185 calls: This spread was bought after rumors of a takeover Mrk It was spreading. If this is not achieved, let these calls expire and do not replace them.

Long 6 CANO Oct (21Street7 calls: Stop yourself when you close below 5.50.

Long October 2 BFB (21Street) 75 puts: We will hold these trades as long as the BFB Put-call ratio is on a sell signal.

Long 1 SPY Oct (7The tenth) 398 CALLS AND SHORT 1 SPY Oct (7The tenth413 calls: This was bought at closing on September 7thThe tenth, since the VIX “peak-high” buy signal was finally confirmed at that time. Technically, this was stopped a couple of days ago, but we didn’t specify a breakpoint in the last report. So, we’ll put a tight order now: stop going out if it’s VIX Close above 27.80.

Long 0 Spy Oct (7The tenth) 400 CALLS AND SHORT 0 SPY Oct (7The tenth415 calls: This spread was purchased in line with direction From VIX buy signal on September 8The tenth. This spread has been discontinued on September 14thThe tenthafter VIX Closed Above 25.00 for two consecutive days.

Long 1 SPY Oct (28The tenth) 406 call and Short 1 SPY Oct (28The tenth421 contact: This spread was bought in line with the McMillan Volatility Range (MVB) buy signal on Sep 9thThe tenth. Stop yourself if SPX Close Below -4σ, which is currently at 3830 and dropping rapidly – so it’s not really “on” at this time.

Long October 6 Holly (21Street20 calls: Wait nonstop for now.

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 the securities recommended in this report, either in person or in client accounts. He is an experienced trader, money manager and bestselling author, Options as a strategic investment.

Disclaimer: © McMillan Analysis Corporation Registered with the Securities and Exchange Commission as an investment advisor and the Commodity Futures Trading Commission 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 the accounts managed by such persons, may have positions in the securities recommended in the advisory.