Opinion: Bulls may be losing enthusiasm for stocks, but these 3 possible takeovers could turn a profit.

The US stock market, measured by the S&P 500 SPX index,
-0.70%,
it finally broke through the triple resistance at 4100 on Feb. 1. But the S&P 500 barely added to that breakout. Instead, the market retreated several times this week and retested what is now support at 4100. So far, this support has held, but some overbought conditions and even sell signals have had time to show up, while SPX has stalled at this areas.

If the support at 4100 gave way, it would be a psychologically disappointing development and would likely push the SPX down to the lower end of its previous trading range around 3800. On the other hand, the initial break reached 4200, which was in line with the end level August. SPX has not closed a gap in its chart since that August time frame (circled in the attached SPX chart).

Rally managed to exceed the “modified Bollinger Band” (mBB) +4σ. Then, when SPX dropped below the +3σ band again, a “classic” mBB sell signal was generated. As SPX dropped even further the next day, a valid McMillan Volatility Band (MVB) sell signal (green “S” on the chart) was confirmed. This will continue until SPX either a) touches the -4σ band, which is the “target”, or b) closes above the +4σ band, causing the trade to stop.

Stock-only put-call ratios continue to decline at a rapid pace. Thus, they are still on buy signals. Now they have fallen to levels close to the levels at which sell signals were generated last year. But we do not use previous levels as indicators for these put-call ratios. Rather, they will remain optimistic for stocks as long as they continue to decline – no matter how low they fall on their charts. They will not generate sell signals until they reverse and start rising.

The latitude has been impressive for over a month. But these recent back and forth movements of the market with several days of sharp decline took their toll. Currently, both latitude oscillators are still giving buy signals, but they have run out of room to maneuver. That is, any further negative accumulation of latitude from today will generate sell signals from latitude oscillators.

New 52-week highs on the NYSE continue to be strong (reaching over 200 in one recent day) while new 52-week lows remain in single digits. Thus, this indicator remains positive for the shares. It will continue to be bullish unless new lows exceed new highs for two consecutive days on the NYSE.

The volatility complex as a whole remains bullish for the stock market as well. Wicks Wicks,
+6.27%
remains low despite relatively strong SPX sales. Thus, a trend buy signal for the VIX (started with a cross inside the green circle on the attached VIX chart) remains in place. The first signs of concern will be if the VIX enters “burst” mode again, meaning if it closes at least 3.00 points higher in any 1-, 2-, or 3-day period. Currently, the VIX needs to close above 21.48 today or Friday to enter “spike” mode again. However, it has not shown any signs of such an upward movement lately.

The volatility derivatives design is also optimistic for equities—for the most part. The only “worry” in the design is that the short-term 9-day CBOE volatility index (VIX9D) is higher than the VIX. This is because the CPI data is due to be released this month on 14 February.th, and that’s within the 9-day “window” for VIX9D. Traders expect the CPI to bring some (more) volatility to stock prices.

We no longer have a “major” bearish position as the SPX has risen above the bear market downtrend line. However, we will trade both long and short as the confirmed signals from our indicators dictate.

New Recommendation: MVB Sell Signal

Since a new MVB sell signal has been generated, we are going to add a position according to this indicator:

Buy 1 SPY (March 17) at the price of a put

And sell 1 SPY Mar (March 17) put with an exercise price 25 pips lower.

This deal would have closed if SPX close above the +4σ band. We will keep you updated on the status of the groups every week.

New Recommendation: Catalent Inc. (CTLT)

Optional volume in Catalent CTLT,
+1.00%
remained elevated for several days after first rising higher on news of a possible takeover of Danaher DHR,
-2.39%.
This rumor has slowed down a bit, but the stock is holding above 70 levels. Stock volumes are positive and there are also buy signals for these stocks with a put-call ratio. Due to price gaps, there is no visible support level until you drop to 58.

Buy 2 CTLT March (17th) 70 calls

Priced at 6 or less.

CTLT: March 71.60 (17th) 70 call: bid 5.50, offer at 6.20

Follow up action:

All stops are mental end stops unless otherwise noted.

We use the “standard” rollover procedure for our SPY spreads: in any vertical bullish or bearish spread, if the underlying asset reaches a short strike then the entire spread is rolled. it would be roll up in case of call-bullish spread or roll down in case of a bearish one, I put a spread. Stay on the same exhalation and keep the distance between beats the same unless otherwise noted.

Long 2 PCAR1 Feb (17th) 64.80 puts: Packar PCAR,
+1.40%
3-for-2 split on February 8th. Thus, “shares per option” was increased from $100 per share to $150 per share, and the exercise price was reduced by two-thirds. The put-call ratio changed after a strong PCAR earnings report. The options are essentially worthless, so we’ll be holding them to see if the stock can pull back a bit.

Long 2 OSH (Feb 17) 30 calls: Oak Street Health OSH,
+0.10%
received a $39 takeover offer from CVS Health. SHS,
+1.25%.
The stock is trading well below this level, presumably due to antitrust concerns, so we are going to exit and take profits. Don’t sell calls below parity.

Long 1 SPY Feb (24th) Call 412 and Short 1 SPY Feb (24th) 426 call: This spread was bought when the SPX confirmed a breakout of the 3940 level at the January 12th close.th. It was rolled up on February 1st when SPY SPY,
-0.72%
trading at 412.

Long 1 SPY Feb (17th) Call 404 and Short 1 SPY Feb (17th) 419 call: This spread was bought in line with New Highs vs. New Lows buy signals. It was rolled out on January 26 when SPY traded at 404. Exit this position if new lows on the NYSE exceed new highs for two consecutive days.

Long 4 NATI Feb (17th) 55 calls: Keep National Instruments NATI,
-0.45%
initially non-stop to see if a bidding war develops.

Long 1 SPY Mar (17th) Call 415 and short 1 SPY March (17th) 431 calls: This trade was set as a “breakout trade” when SPX closed above 4100. Stop yourself on SPX close below 4020.

Long 3 XM March (17th) 15 calls: Continue holding Qualtrics International XM,
-1.34%
while takeover rumors play out.

Send questions to: [email protected].

Lawrence J. McMillan is President of McMillan Analysis, a registered investment and commodity trading advisor. McMillan may take positions in the securities recommended in this report, either in person or in client accounts. He is an experienced trader and money manager, and author of the bestselling book Options as a Strategic Investment. www.optionstrategist.com

©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. Officers or directors of McMillan Analysis Corporation, or accounts managed by such persons, may hold positions in securities recommended in the Bulletin.

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