“The horizontal lines mark levels that coincide with 2x, 3x, 4x, 5x, and 6x the 2009 low. Note that in all cases, the SPX either hesitated for an extended period of time or immediately experienced significant drawdowns from the 2009 closing low immediately after touching these respective levels. While I may be standing in front of myself, the 4,056 area is the next big level to see from this perspective as it is six times the 2009 closing low. If the SPX is 5.5% below this level, there is room to run before this next big hurdle comes into play. ”
– –Monday morning outlook, January 25, 2021
The above excerpt can be used to refer to an updated monthly chart of the S&P 500 Index (SPX – 4,128.80) immediately below. It’s the same chart I took when I made these comments in late January. As you can see, the SPX is now above the 4,056 level, which is six times its 2009 closing low.
There is something to watch out for in this graphic. In three instances – twice the 2009 closing low and prices coinciding with three and five times the 2009 closing lows – these levels marked immediate resistance before notable short-term pullbacks.
For now, the SPX is acting more like the action around four times the 2009 closing low when it immediately pushed through the 2,700 area in January 2018. Note, however, that the outbreak was short-lived as it was corrected by 12% in late February, the fake-out outbreak soon followed.
There is no rule that says that past patterns persist. It should be noted, however, that after long periods of market dynamics as we are now experiencing, these levels corresponded to either the beginning of corrective movements and / or long periods of restless price movements around these key levels. In fact, the SPX began its pandemic-induced bearish price movement at levels five times the 2009 closing low. If past is a prologue in the context of this discussion, the risk / reward scenario at this point is not the healthiest for bulls.
For what it’s worth, as we measure on small-cap stocks, Russell 2000 Index (RUT – 2,243.47)The area from 2,289 to 2,380 marks seven times its valleys from 2003 and 2009 at 327 and 343 respectively. The RUT has had problems reaching these values since February.
If we “enlarge” the SPX by analyzing a daily chart since November 2020, there is also evidence of potential resistance. For example, since the positive headlines about a vaccine started surfing in mid-November, I’ve been discussing a channel that traded that index on most days.
Using the graph below, notice that the SPX has hugged 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, which I circled in the graph below.
A short-term retreat occurred in both cases, with the first retreat pushing the SPX down to its 50-day moving average and the second retreat finding support at its 80-day moving average. In the three cases in which the lower limit of the channel was breached, it was short-lived. That is, Friday’s closing price was above that channel line, which has put the bulls in control this week.
With the standard April expiration week, the potential upside resistance is 4,127, or the top of the channel on Friday expiration. There’s an additional resistance just five points above that level at 4,131, which is a round of 10% above the SPX 2020 close. According to the second graphic below, note that the SPDR S & P 500 ETF Trust (SPY – 411.49) 410 strike, which equates to 4,100 of the SPX.
Much of the volume that makes up the open interest on the SPY 410 strike was bought (to open), so delta hedge purchases related to the calls may have helped push the SPY through the 410 late last week – Strike to urge. With the delta of this option now at 90%, the purchase related to these calls is largely complete, meaning buying options related to the April expiration will not be a supporting factor in the coming days.
In fact, a significant move below the SPY’s 410 strike or the 4,100 SPX by Friday could cause the longs associated with that strike to be liquidated and the odds for the bears to rise this week. If the SPX falls this week, support will be at 3,990, or the channel’s lower bound since November. Additional support ranges between the 80-day and 50-day moving averages, or 3,855 and 3,915, respectively.
– Todd Salamone (@toddsalamone) April 8, 2021
Take note of this as I observed on Twitter on Thursday Cboe Market Volatility Index (VIX – 17.35) Futures options buyers have returned with the 20-day call / put ratio (to open) at 2.21. The graph above shows how this ratio usually precedes VIX pops. The ratio is at its highest level since the end of May 2020, which preceded a VIX pop.
Long-term readers of Monday morning view I’ve seen comments in the past along the lines of VIX option buyers who have historically been smart money. The good news is that the VIX fell below support at 20, as Matt noted last week. In addition, the VIX was below half of its 2021 closing high (37.21) around 18.60. Look for a sharp rise as the VIX closes above 18.60 again in the coming days and weeks.
However, the VIX score is at its lowest level since February 2020, which preceded the sell-off related to the pandemic. With the ability to hedge a long portfolio that is now the cheapest in 14 months given the risk factors I’ve described, now may be the time to hedge long as the higher momentum is currently the biggest factor on the side of the Cop is. However, this could change in the blink of an eye. It is therefore better to be proactive in responding to current risks than to reactionary risks.
Todd Salamone is Schaeffer’s Senior VP of Research