How Talk of Nuclear War Affected Trading This Week

08/10/2017 2:50 am EST

Focus: STOCKS

Lawrence McMillan

Founder and President, McMillan Analysis Corporation

If this news forces SPX to close below 2460, we likely will be into the correction that the market has avoided for so long. Otherwise, it will merely be another minor pullback within the ongoing bull trend, says technical expert and options specialist Larry McMillan.


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Tuesday, things were rolling along at their usual lethargic, bullish pace, trading at a new all-time high by a good distance. Then late in the day, a punch came flying in from somewhere in the back: the threat of nuclear war.

The threat is small, to be sure (or the market would be down a lot more than it is), but it was enough to derail some of the complacency that has gripped the market.

Even with that modest amount of selling, coupled with some further selling Wednesday morning, S&P 500 (SPX) has not even violated the first support level at 2460.

So, the SPX chart remains bullish for now.

Equity-only put-call ratios did not react to the late news Tuesday, so they remain strongly on buy signals.

Market breadth wasn’t good before that late news, and then it deteriorated even more as the selling took hold late in the day. Hence, both breadth oscillators remain on sell signals. However, they are nowhere near oversold levels yet.

Perhaps these oscillators are beginning to regain some relevance, for their most recent sell signals of
just a few days ago are seemingly working out.

Volatility is the area where big changes could take place if complacency is shaken. CBOE Volatility Index (VIX) jumped a bit higher, and Wednesday morning it has even exceeded 12. A close above 13 would be a negative sign from VIX, in our opinion.

The other volatility indices jumped higher, too, but the term structure continues to slope upwards at this point, so that part of the “equation” is still bullish.

The premium on the VIX futures has shrunk dramatically already, though.

That is exactly what happened on the 43-point down day we had two months ago.

It was a correct “prediction” by the futures market at that time – that is, the quick discount move by the VIX futures was a sign that the market was going to quickly recover. Perhaps things are similar now.

What always worries me about that particular scenario, though, is what happens if the futures traders are wrong and the market plunges seriously from here?

It should present some interesting hedging opportunities at the very least. In summary, if this news forces SPX to close below 2460, we likely will be into the correction that the market has avoided for so long.

Otherwise, it will merely be another minor pullback within the ongoing bull trend.

Learn more about Larry McMillan and options strategy here

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