“…. The potential support is at 4,050 – or roughly six times the closing low of 2009 – and the round 4,000 millennium point. For what it’s worth, the 50-day moving average of the SPX, popular with many technicians and retail investors who use technical analysis, is rapidly approaching that 4,000 round level. Notice that this moving average included two of the last three pullbacks in the In index. ”
– –Monday morning outlook, April 26, 2021
“I’ve been seeing an increasing vulnerability to a market decline for weeks, be it based on sentiment or in the case of the last week of the daily candlestick patterns that appeared in late April – the three star doji pattern … With the VIX back below 18, 60… The worst spike in volatility hinted at in the last month may have passed…With the SPX ending at an all-time high on Friday, surpassing more than a week since the bearish three-star doji reversal pattern emerged, one has to wonder if the bulls dodged another bullet. “
– –Monday morning outlook, May 10, 2021
$ SPX below bottom line since + vaccine news in mid-November. Also 6 x ’09 low in the game at 4,056. Albeit belated, 4,056 will have more downs than up moves after the first touch, just like 2x, 3x, 4x and 5x ’09 low? https://t.co/Zebk0DdyBX
– Todd Salamone (@toddsalamone) May 12, 2021
Within a few days, the answer to the question I was thinking about last week was answered. Stocks sold and bulls tested. In particular, at the close of trading on Wednesday, the S&P 500 Index (SPX – 4,173.85) was 4% below its closing price last Friday and again below the lower limit of a channel that had existed since mid-November, wiping out more than a month of profit was 3 days.
However, as in other cases where the SPX moved below its lower channel limit, this was only the case for a short time. In fact, according to the chart below, there was a “trifecta” of support near last week’s closing low of 4,063, with the lower limit channel at 4,072, its 50-day moving average at 4,050, and finally at 4,056, which is six times his 2009 bear market low and a level I’ve discussed several times since the start of the year.
The rally from these support levels was sharp, pushing the SPX back above other key support areas that had emerged the week before at 4,131, which is 10% above the 2020 closing price and 4,100 – the level at which the SPX was above the upper level broke his channel’s limit since positive news about Covid-19 vaccines surfaced.
If we look at the expiration week, I see the mark of the round 4,100 century as a critical level. Not only is this level the location of the breakout above its channel in mid-April, but with the SPX’s 50-day moving average rising about 30 points per week, it is projected to be around 4,100 by the end of the week, and lower at that Limit of the channel will be on Friday at 4,104 p.m. With the SPX trading within this channel for most of the past week, it is possible that its upper bound will act as a resistance starting the week at 4,220 and ending the week at 4,240.
Buy / open the put / call volume ratio in the last 10 days $ NDX Components are now at their highest levels in a year … after weeks of low rates indicating foam … tech investors finally paid the price $ NDX below the Feb summit $ SPX pic.twitter.com/CrZhrDYYp2
– Todd Salamone (@toddsalamone) May 13, 2021
During last week’s retreat, the Nasdaq 100 index (NDX – 13,393.12) found support at around 13,000 millennia levels, with Wednesday’s intraday low of 12,967 just 80 points above its 2020 close at 12,888. As I pointed out on Twitter, the buyers of components of this index have performed strongly over the past two weeks, pushing the put / call volume ratio for its components to an annual high on Wednesday.
The index peaked in mid-April and option buyers eventually reacted to the weakness. While the pessimism measured by this rate did not reach the 2018-2020 level during the withdrawals, the current sentiment supports higher prices in the coming weeks compared to last month’s reading or the extremely low rate that preceded its weakness in September.
The decline in stocks from Wednesday’s low is far from corrective as the SPX has not breached the moving medium-term averages or declined 10% or more in what is commonly viewed as a corrective move in the media.
However, the response to equity weakness since early May has resulted in market participants becoming more cautious, suggesting that over-optimism a month ago has subsided. When the SPX traded in support last week, there were clear signs of pessimism among some market participants, suggesting that many had missed the downtrend from last week’s lows.
“… According to the weekly National Association of Active Investment Managers (NAAIM) survey, the average portfolio exposure was 103.72, with 100.0 considered fully invested and 200.0 leveraged long term. The last time there was a reading of 100.0 was in mid-February. The current reading implies that this group is not a huge potential source of purchasing power as it was in April when reading was 52.02 or only about halfway invested. ”
– –Monday morning view, May 3, 2021
This can be seen not only in the action of buyers of stock options for NDX components that I discussed above, but also in surveys such as the National Association of Active Investment Managers (NAAIM). It was only two weeks ago that I pointed out the high NAAIM score as a sentiment-based risk to the market. Now, just two weeks later, that number is 46.86 or less than half the value invested. It was the largest weekly decrease in exposure since September 9, 2020, and the lowest in more than a year. The implication is that the very group that two weeks ago wasn’t a major source of purchasing power is now a source of purchasing power that bulls can look to.
The 75% rise in the CBOE Market Volatility Index (VIX – 18.81) from Thursday’s intraday high the previous week may have signaled panic among market participants looking to protect the portfolio.
This is exactly why I recommended hedging long positions on the VIX’s recent lows two weeks ago as: 1) buying index put protection turned out to be very costly in the middle of the week, and 2) so much Your Hedging Works You are less prone to panic if you sell long positions at exactly the wrong moment.
On Thursday morning, I pointed out internally that the VIX high on Wednesday and Thursday mornings was at its 320-day moving average – a long-term moving average on our radar, but not on the radar’s longest-term moving average followers. The highs were also around the VIX closing highs from late February.
The subsequent VIX retreat from last week’s high is encouraging as it is: 1) below the 2020 closing price at 22.75, which marked highs in mid-February and mid-March, and 2) back below a trendline that has been in place since the beginning 2021 connects lower highs (see chart below).
However, bulls want the VIX back below half of its 2021 closing high, or 18.60. If the VIX moves back above the trendline connecting lower highs and its 2020 closing price, another volatility pop would likely be imminent.
Finally, since this is an expiration week, it makes sense to rate the SPDR S&P 500 ETF (SPY – 416.49) to assess how much calls and open interest strikes can affect the market.
In the graph below, there is a lot of open interest in the strikes of 390, 400 and 405. Delving deeper into this open interest, it was bought (to be opened) which means the bottom is short for these puts. As the SPY approaches the 405 strike, which equates to 4,050 of the SPX, there is a risk of a delta hedge sell-off, with the floor selling more and more S&P futures to offset the losses on the puts it sold. Such activity could push the SPY down, forcing it to hedge the heavy exposure on strikes 400 and 390. Notice that 4,050 is near six times the 2009 closing low.
In short, if the SPY falls back below last week’s closing low of $ 405.41, we could see a move to 390 SPY or 3,900 SPX (the March low) by the end of the week. Not only would a move below $ 405.41 potentially lead to technical selling, but those who fail to hit the 405 strike puts would have to sell more and more S&P futures to offset lost put short positions. In fact, and in hindsight, last week’s 405 strike may have acted as a magnet as put sellers sold futures to offset growing losses, and those hedges may have been removed immediately after the ETF finally found support, causing a sharp rally contributed the end of the week.
If a spark is missing to get the ball back into the 405 strike, it becomes a quiet expiration week from an options perspective, with the SPY more than 11 points above the $ 405 level. However, with $ 405 touched three trading days ago, the delta hedge sell scenario is a worthy mention.
Todd Salamone is Schaeffer’s Senior VP of Research