Here's how the S&P 500 gets to 5,800 - and stays above it

By Lawrence G. McMillan

Middle East conflict stuns stocks, but key indicators are sending 'buy' signals

The S&P 500 SPX was setting new all-time highs, but then the unnerving developments out of the Middle East caused some consternation and selling this week. The benchmark index has held above its support level at 5,670, so this is just a minor correction so far. There is resistance at the recent highs, near 5,760.

Furthermore, the +4<SIGMA> "modified Bollinger Band" (mBB) is at 5,800, so that is a potential target as well. The McMillan Volatility Band (MVB) buy signal from mid-August is still in effect, and its target is that +4<SIGMA> Band.

The equity-only put-call ratios have returned to a solid buy signal. Last week, they had edged upward, and there was a possibility that they were going to generate sell signals. But that has not been the case. In fact, the ratios have fallen to new relative lows, thus solidifying their buy signals.

Market breadth has been just positive enough to keep the breadth oscillators on buy signals. They have slipped to the point where another day of negative breadth will push them into "sell" territory, but we require a two-day confirmation of any new breadth-oscillator signal. Cumulative volume breadth (CVB) has been strong as well, and CVB has set new all-time highs on several recent days, thereby lending credibility to the similar move by the S&P 500.

On the NYSE, new highs continue to dominate new lows. Thus, this indicator remains bullish for stocks. It would be stopped out of its buy signal if new lows were to outnumber new highs for two consecutive days on the NYSE.

VIX VIX had been giving mixed signals, but that is no longer the case - at least for the moment. The signal that is still in place is the trend of VIX sell signal. It was generated back in late July and has only persisted this long because VIX has not closed below its 200-day moving average (MA) in all this time.

Meanwhile, the VIX "spike peak" buy signal of Sept. 5 was stopped out this week when VIX returned to "spiking" mode. However, that sets up a potential new VIX "spike peak" buy signal when VIX retreats from its current "spiking" mode. Specifically, when VIX closes at least 3 points below the highest price that it reaches while in this current "spiking" mode, that will be a new "spike peak" buy signal. VIX reached 20.73 on Oct. 1. If it doesn't go any higher than that, then a VIX close at or below 17.73 would generate that new buy signal.

The construct of volatility derivatives remains fairly bullish for stocks. There is a slight distortion in the term structure of the VIX futures caused by the expected volatility just after the presidential election. Other than that, there doesn't seem to be any real cause for alarm being registered by the various VIX futures and/or CBOE Volatility Index.

In summary, we are maintaining a core bullish position as long as the S&P 500 remains above 5,670. We will trade any new confirmed signal that occurs, and we will continue to roll deeply in-the-money options.

New recommendation: Potential 'spike peak' buy signal

As noted in the market commentary above, a new "spike peak" buy signal will be generated when VIX closes at least three points below the highest price that it has reached from Oct. 1 onward.

If VIX closes at least 3 points below that highest price, then buy 1 SPY SPY (Nov. 15) at-the-money call and sell 1 SPY (Nov. 15) call with a striking price 20 points higher.

At this time, that highest VIX price is 20.73, so the buy signal would occur if VIX closes at or below 17.73. But there is always the possibility that VIX could register a higher price before reaching a peak, so adjust the numbers accordingly.

New recommendation: LexinFintech Holdings (LX)

LX (LX) has exploded out of a long basing formation, accompanied by extremely strong stock and option volume. There is no specific news, other than that this is a Chinese stock, and many of them are racing to the upside.

Buy 4 LX (Nov. 15) 2.5 calls in line with the market.

We will hold without a stop initially.

Update on Walgreens Boots Alliance (WBA)

This a longer-term potential buy signal from Walgreens Boots Alliance (WBA). We are keeping this recommendation open but will not continue to reprint the reasoning behind the trade, other than to say that stocks that have been removed from the Dow Jones Industrial Average DJIA usually experience a strong rally within weeks after that removal.

We are retaining the same entry price as last week, but using the Oct. 25 expiration now: If WBA closes above 9.80, then buy 2 WBA (Oct. 25) 9.5 calls, in line with the market.

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.

Long 1 SPY (Oct. 11) 550 put: This position is based on the trend of VIX sell signal and would be stopped out if VIX closes below its 200-day MA for two consecutive days.

Long 1 SPY (Oct. 18) 573 call and short 1 SPY (Oct. 18) 590 call: This spread was bought at the close of trading on Aug. 15, when new highs numbered more than 100 for the second consecutive day. It would be stopped out if, on the NYSE, new lows outnumber new highs for two consecutive days. The spread was rolled up when SPY traded at 573.

Long 3 CMG (CMG) (Oct. 18) 57 calls: The weighted put-call ratio of CMG has rolled over to a sell signal, so sell these calls now.

Long 1 SPY (Oct. 18) 570 call and long 1 SPY (Oct. 18) 549 put: This was initially a long straddle, intended to capture a large move in either direction. The puts were rolled down 10 points on Sept. 5, when SPY traded at 549. The calls were rolled up on Sept. 19. Continue to roll either side if it gets 10 points in-the-money; just alter the strike, not the expiration date.

Long 2 AOS (AOS) (Oct. 18) 80 calls: Roll up to the AOS (Oct. 18) 90 calls. We will hold these AOS calls as long as the weighted put-call ratio remains on a buy signal.

Long 0 SPY (Oct. 18) 550 call and short 0 SPY (Oct. 18) 570 call: This was bought in line with the latest VIX "spike peak" buy signal of Sept. 5. It was stopped out on Oct. 1, when VIX returned to "spiking mode," by closing more than 3 points over the preceding three-day period.

Long 10 WEAT WEAT (Oct. 18) 5 calls: These were bought because of the put-call ratio buy signal in wheat futures. We will continue to hold WEAT as long as that buy signal is in effect.

Long 6 APA (APA) (Oct. 18) 25 calls: This is an MVB buy signal. Sell the calls if APA trades at $28. Stop out if APA closes below $23. Note: Both of these prices have been lowered, since the bands are falling.

Long 2 ABNB (ABNB) (Oct. 18) 130 calls: Stop out if ABNB closes below $122.50.

Long 1 SPY (Oct. 25) 573 call and short 1 SPY (Oct. 25) 590 call: Sell this spread if SPX closes below 5,670 for two consecutive days.

Long 2 PLD (PLD) (Nov. 15) 125 puts: We will continue to hold these puts as long as the put-call ratio for PLD remains on a sell signal.

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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10-05-24 0732ET

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