“If we enlarge the SPX by analyzing a daily chart since November 2020, there is also evidence of potential resistance. … Since the positive headlines about a vaccine hit in mid-November, I’ve discussed a channel that traded that index on most days … Note that the SPX has been hugging the upper channel of this trendline for the past week. In fact, the price movement at the top of the channel looks similar to mid-January and mid-February. With the ability to hedge a long portfolio that is now the cheapest in 14 months, now might be the time to hedge long positions as higher momentum is the biggest factor on the bulls side right now. ”
– –Monday morning outlook, April 12, 2021
The bullish factor I mentioned last Monday – the momentum – continued through the standard expiration week. For example, the S&P 500 index (SPX – 4,185.47) has beaten at the 4,131 level above potential resistance, which coincides with a year-to-date gain of around 10%.
Additionally, it appears to be breaking a pattern that was evident earlier in the year, as multiple closings have been made over a canal since mid-November. In fact, last week’s SPX lows were at the top of this channel, in stark contrast to the declines we saw in mid-January and mid-February.
With that in mind, the potential support levels for entering this week’s trading today include 4,131, which is the level corresponding to 10% above the 2020 closing price and the top of the channel. On Friday, the top of that channel is at the half century SPX 4,150 mark.
If you’ve been on this index or an equivalent index for a long time, don’t disturb the positions unless the SPX falls back into its channel by the end of the week. And if you want to give more room to decline before trading, a step below 4,050 may be worth considering.
As of April 8th, the 14-day Relative Strength Index (RSI) of the SPX – an overbought / oversold indicator – has been above 70. This is the longest period above 70 or overbought since August 24th to August 24th September 2, which preceded a 9% decline to its 100-day moving average three weeks later. The SPX’s 100-day moving average is currently 3,839, or 8.2%, below Friday’s close of trading.
From a longer term chart perspective, I still have concerns that the SPX is running out of fuel. The index is above 4,057 or six times its closing low in 2009 and even above the level of 4,140 last week, a Fibonacci retracement of 161.8% from the high and low of the previous year.
I looked at these Fibonacci levels of 161.8% after recent bear markets or tough corrective actions to see if these levels mattered. What I found is worth discussing when analyzing strong progress after a correction of 20% or more or a bear market decline.
The Fibonacci retracement level of 161.8% using the November 2018 intraday high of 2,940 and the December 2018 intraday low of 2,346, a decrease of 20%, was 3,315. The SPX stayed in this range for a brief period in January 2020 and rose 2% in February before finally succumbing to the pandemic-induced sharp sell-off that you will remember very well.
The 161.8 Fibonacci level from the 2007-2009 bear market high was 2,140. This level stopped the SPX in May 2015 before going sideways for a few months. After trading just 1,810 in February 2016, the SPX finally surged above 2,140 in July 2016, before the long-lasting surge finally kicked in in November 2016.
Eventually, the Fibonacci retracement of 161.8% for the 2000 high and 2002 low was 2,035. After the SPX hit this level in November 2014, it went sideways for a long time until early 2016 before reaching that level. For what it’s worth, this area also marked triple the 2009 SPX closing low.
The jury isn’t sure whether the SPX is finally succumbing to longer-term tech specs that have put it at sell-off risk in the past – whether it’s multiples like six times its closing low in 2009, which I’ve discussed at length last weekor the 161.8% retracement area of last year’s highs and lows touched last week.
From a tech standpoint, bulls should stay the course as there has been no technical glitch to eradicate the growing optimism that has contributed to higher fuel inventories. But that doesn’t mean that the risks I outlined last week and today have gone.
The final surge in the Cboe Market Volatility Index (VIX – 16.25), the buy of futures versus buy of put that was discussed last week, is something that you should keep on your radar as it has historically been volatility -Pops preceded. With the VIX closing price at 4:25 p.m., it is below this year’s half-way high at 6:60 p.m. and just over 3:95 p.m., which is half of the intraday high of the last month at 31:90. A VIX pull above 18.60 or a long support period in the 16 area should put you on the alert if a VIX pop appears.
In addition, sentiment polls such as Investor’s Intelligence (II) weekly survey of investment advisors suggest that optimism could soon weigh on the market. The percentage of bulls minus bears was over 40% for the second straight week, with 63% of bulls and 17% of bears among respondents. That reading puts the bulls minus bears in the 90-99th Percentile, and expected returns are historically negative per cells shaded red.
Ultimately, according to the chart below, buyers of stock options are approaching extreme optimism, preceded at best by choppy measures and at worst, noticeable withdrawals.
In short, price momentum is currently favoring the bulls. However, from both a technical and a sentimental point of view, there is enough that you shouldn’t be surprised if a sharp corrective move or a prolonged decline occurs. Plan to hedge or lighten up any long positions first to prove a pullback is underway by either focusing on potential support levels that I discussed earlier in the comment or by allowing the VIX to go above 18.60 .
Todd Salamone is Schaeffer’s Senior VP of Research