“…the SPX bounced off the supportive 80-day moving average, reaching potential resistance levels again. The first was the trendline connecting highs at the start of the current decline, which the index breached on Friday. It comes into the week at 5,102 and will be at 5,077 at the end of the week, meaning it's sloping five points lower each day. However, the convergence of the 30- and 50-day moving averages at 5,130 should be on your radar as a point of potential resistance to watch, if the see-saw action continues. The SPX closed under this level on Friday, putting the trendline breakout in an awkward position heading into next week. Early price action may determine if the SPX breaks out or re-enters the choppy environment.”
-Monday Morning Outlook, May 6, 2024
The S&P 500 Index’s (SPX—5,222.68) converging 30-day and 50-day moving average “resistance” met nothing last week, as the index sliced above them to begin last week’s trading. The 50-day moving average has not been significant in months, so little surprise that it was not significant last week. But the unpopular 30-day moving average proved supportive at the mid-January low and marked resistance in mid-October, and therefore the quick crossover above this trendline was impressive.
As is the case whenever the SPX experienced a healthy pullback or lengthy corrective or bear market action, it claws its way back and there are multiple potential resistance points. In the week prior, it closed above potential trendline resistance connecting lower highs since its peak. While last week, it crossed above the convergence of two important moving averages.
To that point, after three weeks of rally mode, the SPX is again approaching potential resistance from the index's all-time closing high of 5,254. Note that this closing high in late March occurred just above 5,235, or exactly 10% above the 2023 close. Long-time readers of this commentary are very much aware of how round percentage levels like this have a way of acting as hesitation and/or pivot points. In fact, this area was even around Friday’s intraday high.
Also of interest is a line segment that is the site of the breakdown below the lower trendline of a channel in early April at 5,220. The SPX closed just above this level on Friday.
If looking for an entry point on the SPX, await a breakout and close above the all-time closing high with a stop just below it, or await a pullback to the 30-day moving average in the 5,100 area, which is where the SPX broke above the short-term trendline connecting lower highs. Moreover, a trendline using higher lows since last month’s bottom is currently in this area.
“If you are aggressive and anticipate the SPX breaking out above resistance, the one indicator that is giving you permission to do so is the CBOE Market Volatility (VIX – 15.03). In early April, the VIX hinted at higher volatility ahead when it closed above 15.40, or half the 2023 high. It then closed above 18.68 at the start of April expiration week, further hinting at weakness. Since peaking just below the October high point on April 19, it has come down sharply.”
-Monday Morning Outlook, April 29, 2024
“One sentiment indicator that moved in options bulls' favor last week was the 10-day, buy-to-open put/call volume ratio on SPX components. It is now showing hints of rolling over from a relatively high level. This type of behavior typically comes up as the market begins a basing period around the eventual lows, withs some rollovers in the ratio coinciding with bottoms. If the SPX moves above the technical levels discussed above, this indicator will be more valid”
-Monday Morning Outlook, May 6, 2024
Per the excepts above, one by one sentiment indicators are turning more in the bulls’ favor. First it was the Cboe Market Volatility Index’s (VIX—12.55) move back below the important 15.40 level in late April. The advance above 2024’s resistance at 15.40 in early April hinted at increasing volatility and lower equity prices, and the move back below it foreshadowed the decreasing volatility and advance in stocks so far this month.
Last week, option buyers on SPX components began buying less puts relative to calls compared to prior weeks, which created less of a coincidental headwind and foreshadowed a trough and/or bottoming process at hand.
A third indicator turned bullish last week, with the release of short interest data from the exchanges late last week. This data is as of the last day of April trading, so technically this indicator turned bullish in late April. But it wasn’t apparent to us until the exchanges released the data last week.
Per the SPX component short interest graph with SPX overlay below, short interest rolled over after a steady build to a multi-year high. The bottom line conclusion when looking at this graph is bullish, with the SPX trading around its all-time high. The absolute level of SPX component short interest in context of the index itself being near an all-time high suggests that many short positions are underwater. This implies that at a minimum, shorts will not continue to build position, while the possibility of forced short covering would be supportive of a rally.
One sentiment indicator that was in neutral mode last week was the National Association of Active Investment Manger’s (NAAIM) weekly exposure survey. The active managers surveyed in the prior week had roughly 50% exposure but as of last week moved closer to full exposure. This suggests little left in the fuel tank if you are depending on this group to support the market.
Stay in tune with the levels mentioned earlier in this commentary as various sentiment indicators improve for bulls.
Todd Salamone is the Senior V.P. of Research at Schaeffer's Investment Research.
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