Opinion: Stock Market Momentum Building Towards a Breakthrough

A break to new all-time highs, on a two-day close basis (i.e. SPX should close on a new high above 4238 two days in a row) would a significant development and would require the addition of long positions.

However, as long as this resistance continues, the bears have a fighting chance to push the market back to the low of its now two-month trading frenzy: 4060. Below that, there’s support at 4000 and 3870, but for now, the 4060 area is important. because if it succumbs, that would be a big, negative disappointment.

Ironically, the SPDR S&P 500 ETF relies on SPY,
+0.04%
has made some new all-time highs on an intraday basis in the past week. The difference is when the dividends are paid by SPY vs. SPX stock. A positive internal development is that the Russell 2000 Index RUT,
+0.76%
has gotten much stronger and is also about to break out to new all-time highs. That’s one of the improvements in the internal indicators I was talking about.

For the record, the May 11 McMillan Volatility Band (MVB) sell signal is still in effect.

Equity-only put-call ratios have fallen over the past week, and both indicators (the standard- and weighed ratios) have therefore issued buy signals. There have been very heavy call buys as the meme stocks and others influenced by coordinated social media buying have exploded again in many cases. As long as these put-call ratios fall, it’s bullish for the stock market. So these new buy signals are another improvement in the internal indicators.

The width is strong and improved. Thus, both width oscillators remain on buy signals. They’ve moved into modestly overbought territory, which is a good thing when SPX hits new highs (well, almost breaks out). As such, the latitude oscillators can withstand a day or two of negative latitude without necessarily rolling over to sell signals. In addition, the cumulative width indicators have made new all-time highs on eight of the last ten trading days.

New 52-week highs are again completely dominant over new 52-week lows. In fact, on the New York Stock Exchange, the new 52-week lows are back in the single digits. This indicator remains bullish for stocks.

Volatility also remains generally optimistic in the stock market outlook, although the CBOE Volatility Index VIX,
-3.23%
stubbornly holds above 16. The VIX peak buy signal of May 21^st remains in place and the general trend of VIX is lower. However, there are apparently plenty of traders who still worry about the downside of continuing to buy SPX puts, which in turn keeps VIX somewhat inflated. This is a minor negative factor, but it should be noted nonetheless.

The construction of volatility derivatives is also a bullish factor for the stock market. The first month VIX June futures expire next week. July futures are trading at a very high premium to VIX (about 3.00 points), and the term structure of VIX futures is moving up through November. The term structure of the CBOE Volatility Index is also moving upward.

In summary, there are buy signals and improving indicators almost everywhere. However, with confirmation from SPX, they don’t mean much. At this point, straddle buys are still a smart move, although a two-day close above 4238 by SPX will be anything but clear for a strong upward move.

New recommendation: Covanta Holding

There were rumors that Covanta Holding Corp. stroke,
-0.97%
considered strategic alternatives, including the possible sale of the company. The stock rose higher accompanied by very strong and improving stock volume patterns, while option volume exploded to about ten times normal.

Buy July 6 CVA (16 .)^this) 17.5 calls at a price of 1.00 or less.

CVA: 17.60 July (16 .)^this) 17.5 call: offered to 1.00

New Recommendation: SmileDirectClub

The SmileDirectClub Inc. campaign. SDC,
-3.85%
is based on a takeover rumor and option volume has exploded, with more than 172,000 contracts traded yesterday (of which 164,000 are call options). That’s about five times normal. Inventory volume patterns are positive and improving.

Buy 4 SDC July (16.)^this) 9 calls at a price of 1.50 or less.

SDC: July 9.73 (16^this) 9 call: offered at 1.55

follow-up action

All stops are mental closing stops unless otherwise stated.

Long 2 Expired SPY Jun (11^this) 410 puts and short 2 SPY Jun (11^this) 385 move: this transaction was originally taken due to the MVB sell signal which occurred on May 12 12^this. It would be stopped by SPX closing again above the +4 band, which is at 4320 and moving sideways. The signal would reach its profit target if SPX trades on the -4 Band. At this point, the bottom band is about 4050 and slowly rising. We want to hold a position here as the sell signal is still in effect so sell the current spread and replace it with buy July 2 SPY (2 .)^nd) 410 moves. We no longer use a spread here, only long puts.

Long June 1 SPY (18 .)^this) 420 put and short 1 SPY June (18 .)^this) 400 move: this recommendation was based on the stock-only put-call ratio sell signal in effect. Since that sell signal is no longer present, exit this spread.

Long 3 DUK June (18^this) 100 calls: holding on without ceasing while we wait for the activist investor to deliver a positive outcome.

Long 2 SPY June (18 .)^this) 415 calling and Short 2 SPY June (18^this) 428 calls: this spread was bought when the most recent VIX peak buy signal was confirmed on Friday, May 21 on^st. It would be stopped if VIX returned to peak mode, i.e. if it rose at least 3.00 points over a period of 3 days or less (using closing prices).

Long June 1 KSU (18 .)^this) 300 bells: KSU has formally accepted the higher takeover offer from Canadian National (CNI). The deal is for $200 cash + 1,129 shares of cni. So with a CNI of 110, the deal is worth $324. Of course, there will be regulatory delays. We’re going to keep it up, so see if this spread can be a little tighter. It is unclear whether Canadian Pacific the other bidder will come back with a superior bid or not. Finally, stop the calls if: CNI closes at 108 or below.