The S&P 500 index finally traded at new intraday and closing all-time highs, exceeding the gap opening of Nov. 9. There has been a brief pullback to the old highs (at 3644) to test the breakout. So far, the retest has held, and with this being a positive seasonal period for the market, stocks should be able to advance — even though November’s strong rally pushed a number of indicators into overbought territory (remember, overbought does not mean sell). There is further support at 3550, and then at 3500.

As long as the S&P 500
SPX,
+0.25%

remains above 3500, its chart is in a bullish mode. A close below 3500 would be game-changer and would turn the chart bearish.

The “modified Bollinger Bands” (mBB) are beginning to tighten slightly, as realized volatility is slowly decreasing. But SPX has not moved outside of either the +4σ or -4σ Band, so no signals have been forthcoming since early September.

Equity-only put-call ratios are falling rapidly once again. Thus, these ratios remain on buy signals, albeit in very overbought territory. There has been heavy call buying for several weeks now, and it does not appear that it is going to abate soon.

There have been several daily CBOE equity-only put-call ratio readings below 45, and even a couple below 40. That represents an extreme amount of call buying, and that is dangerous for the market from a contrarian point of view. However, there will not be sell signals from these ratios until they roll over and begin to rise.

Breadth continues to be a strength for the market. Our breadth oscillators remain on buy signals, in modestly overbought territory. In addition, cumulative volume breadth (CVB) continues to make new all-time times, including on Wednesday. The cumulative advance-decline line has not made a new all-time in the past six days, but it is very close to doing so. It is way too early to say that a negative divergence has developed.

New lows are basically nowhere to be seen, so new highs easily outdistance them, and thus the “new highs vs. new lows” indicator remains positive for stocks.

Volatility continues to slowly decline. This past week, VIX
VIX,
-0.94%

 traded at its lowest levels since February. The trend of VIX is downward, and that is bullish for stocks. The VIX 200-day moving average is still rising, though, and it is much higher – above 32.

But it will start to decline soon unless VIX rises back above the 200-day average. That seems unlikely, and we would have other negative indicators setting off alarms before that happened (such as VIX returning to a “spiking” mode). The previous VIX “spike peak” buy signal of late October has “expired,” but the market is still riding the momentum of that well-timed buy signal.

The construct of volatility derivatives remains modestly bullish. The CBOE Volatility Index term structure slopes upward. The VIX futures are trading at a premium to VIX. Finally, the VIX futures term structure only slopes upward in the front end, and then it flattens out after that. So, “mostly bullish” is the result.

The record-setting move in November continues into December. We have seen this movie before (2017 and 2019, which eventually led to very nasty corrections or even bear markets). So, we remain bullish, but we are certainly not going to get complacent. We will trade confirmed signals whenever they occur.

New recommendation: Ambarella

Ambarella
AMBA,
+3.22%

 has been a strong stock in its own right, and now there are takeover rumors, with Amazon.com
AMZN,
-0.09%

being mentioned as a possible buyer. Option volume exploded on that rumor, and stock volume patterns are very strong and improving.

Buy 2 AMBA Dec (31st) 85 calls

At a price of 5.00 or less.

AMBA: 85.69 Dec (31st) 85 call: 5.50 offered

New recommendation: Novus Capital

Novus Capital
NOVS,
+1.33%

 is a SPAC (Special Purpose Acquisition Company). There has been a lot of extreme speculation in SPACs, and this one is joining the fray. One pattern that seems to exist is that the SPAC jumps higher on the first news of a deal, then pulls back. But if it can break out over the highs of the first announcement, then there is a good chance of a strong rally. In this case, Novus spiked up to 13 in late September on the first announcement that it is going to bring AppHarvest public. When the AppHarvest IPO takes place, Novus will change its name and stock symbol.

The stock is now approaching the breakout level above 13 and will be a “buy” if it can hold that level.

Conditional call buy in NOVS:

IF NOVS closes above 13 on any day,

THEN buy 4 NOVS Jan (15th) 12.5 calls.

NOVS: 12.95 Jan (15th) 12.5 call: 1.90 offered

Follow-up action

All stops are mental closing stops unless otherwise noted.

• Long 500 CLIR common stock: The closing stop remains at 1.85.

• Long 5 IVZ Dec (18th) 16 calls: Since we rolled up, we are no longer using a trailing stop here. Continue to hold.

• Long 500 shares of SURF common: Stop yourself out on a close below 7.50.

• Long 1 SPY Dec (18th) 364 call and short 1 SPY Dec (18th) 376 call: A SPY call spread was originally bought on the VIX “spike peak” buy signal that occurred on Oct. 29 and then rolled up.

• Long 2 CLGX Dec (18th) 75 calls: Hold without a stop while the takeover rumors play out. This past week, a CoreLogic
CLGX,
+0.47%

 official said the company is committed to “running a full sales process.”

• Long 2 SPY Dec (11th) 363 calls and short 2 SPY Dec (11th) 378 calls: These were bought when SPX finally closed above 3588 on Nov. 16. Change the stop: stop yourself out on a SPY close below 357.

• Long 2 VIX Dec (16th) 25 puts and short 1 VIX Dec (16th) 50 put: we are looking for VIX to fall below 18 or rise above 32 by expiration.

• Long 2 ACM Dec (18th) 50: Raise the closing stop to 49.10.

• Long 2 IWM Dec (18th) 183 calls: We bought these for the post-Thanksgiving trade. Roll up to the 191 strike if the iShares Russell 2000 ETF
IWM,
+1.09%

 trades at 191 at any time. We will eventually roll to January options, as we plan to exit on the second trading day of 2021.

Send questions to: [email protected].

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 bestselling book “Options as a Strategic Investment.”

Disclaimer: ©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.