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McMillan's Technical Guidelines

12/02/2014 9:00 am EST


Lawrence McMillan

Founder & President, McMillan Analysis Corporation

The stock market, as measured by the Standard & Poors 500 Index, continues to march upward at a dizzying pace, observes technical expert Larry McMillan, editor of The Option Strategist.

The S&P 500 (SPX) has not even bothered to close below its five-day moving average since the October 16 bottom.  That is the longest such streak in history according to a CNBC report. That is just one sign of an overbought market.  

Equity-only put-call ratios remain on buy signals.  However, the weighted ratio has reached levels not seem since last January, shortly before a rather sharp market pullback.  

The standard ratio is not as low, but these are in overbought territory. Meanwhile, the chart of the QQQ weighted put-call ratio has already rolled over to a sell signal.  I would not think that the equity-only ratio will be far behind.

The total put-call ratio also remains on a buy signal. The buy signal of October 27 has already fulfilled its target of a 100-point gain in SPX. There is a secondary target of 2118 for SPX, based on a slightly different interpretation of the buy signal.

Market breadth has improved in recent days. For one or two days, the breadth oscillators deteriorated enough to slip into sell signals. But those were quickly canceled out as the broad market rally persisted.  

Now, both of the breadth oscillators remain on buy signals and they are modestly in overbought territory. It would likely take two days of negative breadth from these levels to knock them back down onto sell signals.  

Cumulative breadth remains a problem, however. Since last July 3, SPX has made a new closing all time high 22 times. But cumulative stocks only breadth has not made a new all-time high once since then.  Thus, this is a negative divergence that continues to persist.  

These cumulative breadth divergences can persist for a long time, but their importance is that one should not ignore sell signals while breadth is in this state. Hence, we will take the mBB sell signal, and any others, when and if they occur.

Volatility indices have generally been declining, and while VIX can certainly be considered overbought as it hovers near 12, stocks can continue to advance while these volatility measures meander at low levels.

VIX hasn't closed above 14 since early November, but it seems to me that the threshold for bearishness is dropping.  Hence, it now seems that a VIX close above 14 would be negative for stocks.

The construct of the VIX futures and the CBOE's Volatility Indices remains positive.  In fact, the term structure has been steepening, which is quite bullish. In summary, the intermediate trend is bullish, but the overbought condition is getting to be problematic.

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