“When buyers show up, the first potential resistance area is between 4,193 and 4,212, or the lower bound of its channel. The second area of resistance is between the early May closing high at 4,232 and last week’s closing high at 4,255. Thursday and Friday candles look very similar to May 11th and 12th, which was the last time the SPX closed below the lower bound of its channel.”
– Monday morning outlook, June 21, 2021
After another false positive regarding a technical breakdown, the S&P 500 Index (SPX – 4,280.70) quickly reversed its losses after expiration and a week-long sell-off in response to the FOMC meeting. In fact, as I mentioned last week, the channel breakdown occurred in the context of late week candles, very similar to May 11th and 12th, which preceded a rally following a false alarm that same month.
With the SPX quickly back in a bullish channel that has existed since mid-November while making new all-time highs, the bulls remain firmly in control. In the options market, the ratio of buy-to-open put volume to buy-to-open call volume continues to decline to extreme levels as both momentum and slight pullbacks attract stock speculators.
“The bearish “Tri-Star” Doji pattern that surfaced on the SPX in April continues to stand out … It took the index six to eight weeks to fully recover from similar bearish patterns in January and February. The bulls have a glimmer of hope that we are closer to the back end of the bearish impact of this multi-candle sell signal as this latest bearish “tri-star” Doji pattern emerged nearly two months ago. Coincidentally, the pullback on Friday was near the SPX closing times in late April. “
– Monday morning outlook, June 21, 2021
Within a week, the SPX fluctuated on a deteriorating technical backdrop, then rebounded to overcome various potential levels of resistance, particularly its all-time high from early May. As I said a few weeks ago, if the SPX spends most of its time inside the upward channel that was taking shape at the same time as positive Covid-19 headlines, it would be seen as a win for the bulls as support and resistance move the levels out those who have this channel increase with each passing day.
Looking at the week that will include the last day of the second quarter as well as the beginning of the third quarter, the bottom of the channel begins at 4,215. On Friday it will happen to be at 4,232, which is its May all-time high that was just pulled out last week. Thus, the area between these levels defines the first support area.
It will take a much larger decline in the SPX to seriously resolve the growing optimism we are seeing among retailers and stock option buyers. For example, the range between 4,056 – six times the 2009 SPX closing low – and 4,100 is significant. The latter is a round number and the location of the eruption above the upper limit of the channel in early April. The former is a level I continue to watch as levels two to five times as low since the 2009 closing low have marked long periods of hesitation or notable corrective moves.
However, 4,056 was different in that we saw neither hesitation nor corrective movement in this area from that point on. In fact, after breaking above 4,056 in early April, that point served as support in both late April and early May.
The SPX is about 4.5% above the 4,056-4,100 range. With the Cboe volatility index (VIX – 15.62) going into a new week and quarter at 15 – that was the value before the sharp sell-off of Covid-19 in early 2020 and a level from which it has recovered in the last few months – Hedging long positions to protect against midsummer and / or late summer surprises may be appropriate.
If the SPX trades below 4,056-4,100 in the coming weeks, portfolio insurance will be significantly more expensive than it is now. Therefore, it is better to buy portfolio insurance when few think you will need it than when many fall on each other to buy it.
“New York Fed President John Williams told Bloomberg Television on Tuesday that the start of the future was “still a long way off” and the central bank was not close to reducing bond purchases. The next day, Atlanta Fed President Raphael Bostic said the decision to reduce the rate hike could come in the next few months and he expects the Fed to hike rates in late 2022. Chairman Jerome Powell himself told Congress that the central bank will wait. actual evidence of actual inflation “before interest rates were raised.”
– Bloomberg, June 25, 2021
Finally, over the course of the summer, investors will be looking for clues as to what exactly was the impact of the FOMC meeting two weeks ago. In other words, were they hawkish at first sight, driving a shift into bonds and out of commodities and financials? Or were they reluctant, as Federal Reserve Chairman Jerome Powell and New York Fed President John Williams announced last week and reversed the price of financial and commodity stocks last week?
It is best not to jump to conclusions about what Fed governors have said in the media, and to listen to the voices that matter. For example, according to the Bloomberg excerpt above, Powell and Williams are FOMC voters for this year and through 2023 if they stay in their respective positions. Because of this, her words may carry more weight than those of Atlanta Fed President Raphael Bostic, who is voting in the FOMC this year but won’t vote again until 2024.