The Bulls Are Fighting Off Challengers to Control the Stock Market

The U.S. stock market, as gauged by the S&P 500 index, persists in its robust and optimistic bullish trend. Currently, the S&P 500, NASDAQ-100 Index, and Dow Jones Industrial Average are achieving record highs, though certain stocks, such as the Russell 2000, are trailing behind. However, for those holding the S&P 500 or index-related options, the chart signals a bullish trend, justifying a core bullish position. While warning signs are emerging, such as deteriorating market breadth, confirmed sell signals are yet to materialize for the most part.

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Examining the S&P 500 chart, support is identified at 4,850 (last week's lows) and more robustly at 4,800. Notably, major support exists at 4,600, although a pullback to this level, being more than 300 points lower than current levels, raises some concerns.

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Given the absence of traditional resistance due to the S&P 500 trading at all-time highs, the index has nearly reached its +4σ "modified Bollinger Band." A close above this band would negate the "classic" mBB sell signal. However, the preference is for the more comprehensive setup of the McMillan Volatility Band sell signal, which is yet to materialize. Closing above the +4σ Band would reset the process, requiring the generation of a new sell signal.

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Equity-only put-call ratios have maintained a mostly sideways movement, recently turning downward and nearing the lower edges of their charts, signaling an overbought condition. While not the ideal territory for a buy signal, a bullish trend for stocks persists as long as these ratios continue their downward trend. The current downturn is marked with a small "b," acknowledging its origin from a low level on the chart.

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Market breadth has been lackluster, with breadth oscillators on sell signals, and Cumulative Volume Breadth indicating a negative divergence. Despite the S&P 500 reaching new all-time highs, the divergence between cumulative volume breadth and the index is apparent, serving as a potential warning sign for the stock market. However, negative divergences can persist without an immediate sell signal, necessitating caution.

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Volatility, as measured by the VIX, remains at low levels, presenting no immediate concerns for the stock market. The trend of the VIX buy signal remains intact, with the 200-day moving average at 15.20 serving as the first sign of potential trouble if breached.

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Volatility derivatives further support a bullish outlook for the stock market, as the term structures of VIX futures and the CBOE Volatility Indices continue to slope upward.

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Maintaining a core bullish position, trading other confirmed signals around it, and rolling calls up to higher strikes when deeply in-the-money are part of the current strategy. Notably, there is a developing negative divergence between cumulative volume breadth and the S&P 500, with the former lagging behind the index's new all-time highs. While not an immediate sell signal, caution is advised, and the team plans to act on the breadth oscillator sell signal in conjunction with this divergence.

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Additionally, potential sell signals involving the McMillan Volatility Band and VIX are being monitored. These recommendations involve buying at-the-money puts and selling lower-strike puts. It is emphasized that these trades will be stopped out or acted upon based on specific conditions, such as the S&P 500 closing above or below certain levels.

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Ongoing follow-up actions include raising stops for certain positions, such as the XLP Feb. 16 72 calls, and rolling up calls whenever they become at least eight points in-the-money for positions like the SPY Feb. 16 493 call. Trade recommendations involving SPY calls, TLT puts, UNM calls, and additional SPY calls are also addressed, with specific instructions for each position.

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