“As of May 13th, all SPX closings have been on the channel I included in this comment. However, this could be seen as a win for the bulls … Note that last week the SPX failed to break this year’s closing high of 4,233 in early May, which is another level to be prepared for. “
– Monday morning outlook, June 7, 2021
Although there was a small change last week, the spirit of my observations will be in the game as we enter the standard expiration week in June. That said, the all-time closing high of the S&P 500 Index (SPX – 4,247.44) in early May of 4,232.60 remains important in the short term. After struggling to overtake these levels early last week, trading sessions hit new record closing highs on Thursday and Friday. However, Friday’s intraday low was back below 4,232.60, suggesting these closes are hardly convincing breakouts, even though the heat on bearish market participants has apparently gotten higher.
If a more convincing breakout occurs this week, the next thing to watch is the upper bound of the channel, shown in the graph below, which was just above the round 4,300 century mark at 4,323 on Friday. For what it’s worth, the 4,296 level is around 20% above the October 2020 all-time high. For those who bought the November breakout above the October high that appeared when positive headlines about Covid-19 Vaccines surfaced, the 4,300 area could prove important from a profit-taking perspective with a rounded number percentage above a previous high. Finally, and coincidentally, 4,300 on the SPX is Wall Street strategists’ median year-end goal for the SPX.
If sellers emerge and push the SPX back below the May closing high, the potential support is between 4,170 and 4,190, or the lower bound of the November channel plus near the SPX’s 50-day moving average.
With regard to the open interest configuration of the SPDR S&P 500 ETF Trust (SPY – 424.31), the big call open interest in the 425 strike – which corresponds to SPX 4.250 – sticks out to me. Most of these calls were bought to open, which means that if the SPY stays below the 425 strike through Friday, there will be sales of S&P futures related to this call open interest, resulting in an expiring Headwinds for stocks leads. A less likely scenario would be delta hedge purchases, which generate above-average immediate tailwinds. However, with strikes above 425 there aren’t many call open interests that could act as a magnet, exposing the SPX to the risk of quickly moving back towards the strike after an initial breakthrough.
According to the second open interest graph below, the least likely scenario is a delta hedge sale in the coming week, as the largest put open interest strikes – where there are not a large number of call contracts – only occur when 390 strikes come into play, which is about 8% less.
“…Options speculators reached a level of caution or pessimism on the components of the Nasdaq 100 index (NDX – 13,686.51) more than a year ago … call buying (a speculative bullish bet or a short position hedge) was in the upper Area of that 2-1 / 2 year period before it was rolled over. The rise in this ratio of high levels has historically been bullish, suggesting that this group’s pessimism may have peaked. As a result, the chances that this group could regain leadership after disappointing most investors this year have improved.. technical challenges remain for the index. First and foremost, the 14,000-year barrier that stalled the index in April must be overcome. “
– Monday morning outlook, June 1, 2021
Since I made those comments earlier this month, the Nasdaq-100 index (NDX – 13.998.30) has rebounded nearly 300 points, or just over 2%. However, it remains below the critical 14,000-year mark. This negative sentiment, as measured by option buyers on NDX components, is quickly resolving, as per the graph below, which features an overlay of a related exchange-traded fund called Invesco QQQ Trust Series (QQQ – 341.24).
As for resolution, the direction of the 10-day buy-to-open put / call volume on NDX components is bullish as there is still room for this ratio to move before reaching what is known as a is considered overly optimistic.
A sustained weakening of bearish sentiment from a few weeks ago could finally push the NDX above the elusive 14,000 level this week. In fact, the price move around the 14,000 level since mid-February is similar to the NDX’s behavior around 12,000 in late August to November 2020. If a breakout above 14,000 occurs, the next hesitation could be 14,176, which is about 10% above the 2020 NDX close.
$ VIX Billing Wed on 17/25 … Huge # put contracts expired worthless … Call contracts of this size were common in the past. Now $ VIX has space to check before the next big event on June 16. to run downstairs pic.twitter.com/Iye6whWJo2
– Todd Salamone (@toddsalamone) May 20, 2021
Options on Cboe Volatility Index (VIX – 15.65) futures expire on Wednesday morning. So I can’t help but go back to the last major VIX expiry back in May. I made the above observation on Twitter in May. Since I made that comment, the VIX has fallen significantly, hitting a low of 15.15 on Friday, which is comparable to a low of just under 17 before the VIX futures options expire in May.
Notice in my Twitter comment last month that I included a VIX Open Interest configuration diagram for May. The VIX low on May 7th was around May 17th ahead of its May 19 settlement value of 25.46. The volatility pop has left a large number of put contracts worthless.
The VIX low around last week’s heavy put-open interest is somewhat similar to the May action. It would require a major volatility pop within the next few days for a corresponding number of put contracts to expire worthless on settlement on Wednesday morning. However, this should be noted at the beginning of the week.
In other words, a volatility pop could be exaggerated on any news that triggers a decline in stocks. Such a scenario could be another opportunity to sell the volatility following the settlement of the VIX futures on Wednesday morning and the expiration of the VIX options in June. As a side note, there is a Federal Reserve Open Market Committee (FOMC) meeting this week, but whatever comes out of it will likely not be made public until after the VIX is finalized Wednesday morning.