MW Enjoy the stock market's rally - but watch out for these overbought indicators

By Lawrence G. McMillan

The S&P 500 looks strong - but at these levels, it's wise to be wary

The S&P 500 index SPX chart is strong and the market internals - while overbought in some cases - generally remain positive. There is now resistance at 6,300, while several support areas are evident: 6,200 (this week's low); the previous highs at 6,150; the gap at 6,020 to 6,060; and down to 5,920. A drop below 5,920 would no longer be bullish.

A full McMillan volatility band $(MVB.AU)$ sell signal has occurred. (It is marked as a green "S" on the SPX chart above.) The target for this trade is for SPX to trade at the -4<SIGMA> band, which is currently at 6,030 and rising rapidly. The trade would be stopped out if SPX were to close back above the +4<SIGMA> band, which is at 6,300 and moving sideways.

Equity-only put-call ratios continue to fall - bullish for the stock market. They are low on their charts, meaning that they are in overbought territory, but unless they roll over and begin to trend higher, they will remain on buy signals.

Market breadth has mostly been positive, except for one day that sent the NYSE-based breadth oscillator into a sell signal. But the "stocks only" breadth oscillator did not follow suit. So, for now, these two are not in agreement. If they both generate sell signals, then we would take a position. Otherwise, we're just observing.

New highs on the NYSE have continued to outpace new lows, so this indicator remains bullish for stocks. It would be stopped out if new lows were to exceed new highs for two consecutive days on the NYSE.

Realized volatility continues to decline, with SPX at or near all-time highs. The 20-day historical volatility of SPX (HV20) is now down to 9%. If it falls to 8%, that would be an overbought condition that would eventually lead to a sell signal.

VIX tends to make a low in July and then rises later.

Meanwhile, implied volatility - in the form of VIX VIX - remains relatively subdued. It has hovered near 17.0, although there was a probe up to 19.0 this week. Still, VIX remains below its 200-day moving average, which is important - for it means that both the "spike peak" and "trend of VIX" buy signals are still in place. VIX tends to make a low in July and then rises later. The first step would be a close above the 200-day MA.

The construct of volatility derivatives remains bullish for stocks. The August VIX futures are now the front month, since the July futures expired. The term structures of both the VIX futures and of the Cboe volatility indices slope upwards. Furthermore, there is a strong premium in the VIX futures. We are watching the relationship between the August and September VIX futures. If August should trade above September, that would be bearish. Currently, there is no indication of that happening.

In summary, we remain bullish, but vigilant. The first confirmed sell signal (MVB) has appeared and there are other overbought conditions. We will trade confirmed sell signals. Meanwhile, continue to roll deeply in-the-money calls up to higher strikes.

New recommendation: MVB sell signal

There is a new McMillan volatility band (MVB) sell signal.

Buy 1 SPY SPY (Sept. 19) 625 put and sell 1 SPY (Sept. 19) 575 put in line with the market.

This signal has a target of the -4<SIGMA> band, which is currently at 6,030 and rising. It would be stopped out if SPX were to close above the +4<SIGMA> band.

New recommendation: Docusign (DOCU)

A weighted put-call-ratio buy signal was generated last week in DOCU (DOCU), which is attempting to recover from its most recent negative earnings report. A move above $80 would be positive confirmation of this buy signal. The conditional recommendation was not filled since the condition was not met. The recommendation remains open again for this week:

Conditional call buy in DOCU: If DOCU closes above $80, then buy 3 DOCU (Aug. 15) 80 calls in line with the market.

Follow-up action:

All stops are mental closing stops unless otherwise noted.

We are using a standard rolling procedure for our SPY spreads: In any vertical bull or bear spread, if the underlying hits the short strike, then roll the entire spread. That would be roll up in the case of a call bull spread or roll down in the case of a bear put spread. Stay in the same expiration and keep the distance between the strikes the same unless otherwise instructed.

Also, for outright long options, roll if they become 8 points in-the-money.

Long 2 expiring APH $(APH)$ (July 18) 95 calls: Roll to the APH (Aug. 15) 100 calls and raise the closing stop to 95. Roll up again at 115.

Long 1 expiring TSEM $(TSEM)$ (July 18) 42 call: Roll to the TSEM (Aug. 15) 45 call; roll up again at 50.

Long 1 SPY (Sept. 19) 585 call and short 1 SPY (Sept. 19) 635 call: This is the position based on the differential between implied and historical volatility. Raise the trailing stop; stop out if SPY closes below 615.

Long 2 expiring SPY (July 18) 621 calls: This position was bought in line with the cumulative volume breadth $(CVB.AU)$ buy signal. That signal is still in effect. CVB made an all-time high on July 14 and July 16. The target was for SPY to eventually make a new all-time high, which it has done. Roll to the SPY (Aug. 1) 624 calls. Hold with a trailing, closing stop at 615.

Long 6 expiring DOUG $(DOUG)$ (July 18) 2.5 calls: Stock volume remains strong here, but option volume does not. Sell these calls and do not replace them.

Long 1 expiring SPY (July 18) 601 call and short 1 SPY (July 18) 621 call: This position is the "trend of VIX" buy signal. Stop out if VIX closes above 21.0 for two consecutive days. Sell the spread and replace it with the following: Buy 1 SPY (Aug. 15) 625 call and sell 1 SPY (Aug. 15) 640 call.

Long 4 expiring BKR $(BKR)$ (July 18) 39 calls: The put-call ratio has rolled over to a sell signal. Sell these calls and do not replace them.

Long 1 SPY (Aug. 1) 610 call and short 1 SPY (Aug. 1) 630 call: This is the "spike peak" buy signal of June 24. Stop out if VIX closes above 22.51. Otherwise, we will hold for 22 trading days.

Long 5 expiring SVXY SVXY (July 18) 42.5 calls: We monitor the weighted VIX futures premium via a proprietary calculation. Specifically, the calculation is currently at 2.43. This trade would be stopped out if it drops to 0.50 or lower. We will update the calculation weekly. Roll to the SVXY (Aug. 15) 44 calls.

Long 4 expiring CORZ $(CORZ)$ (July 18) 17 calls: Even though the spread is wide here, we are not going to pursue this any further. Do not replace these calls.

Long 1 SPY (Aug. 29) 625 call and short 1 SPY (Aug. 29) 645 call: We will hold until new lows outnumber new highs for two consecutive days on the NYSE.

All stops are mental closing stops unless otherwise noted.

Send questions to: lmcmillan@optionstrategist.com.

Lawrence G. McMillan is president of McMillan Analysis, a registered investment and commodity trading advisor. McMillan may hold positions in securities recommended in this report, both personally and in client accounts. He is an experienced trader and money manager and is the author of the book, Options As A Strategic Investment. www.optionstrategist.com

(c)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. The officers or directors of McMillan Analysis Corporation, or accounts managed by such persons may have positions in the securities recommended in the advisory.

-Lawrence G. McMillan

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July 17, 2025 12:30 ET (16:30 GMT)

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