Many major indexes are testing round, psychological levels
“Last week’s sharp rally occurred in the context of not only positive seasonality, but the bullish ‘head & shoulder’ breakout pattern from mid-September…The target for the S&P 500 Index …based on the technical pattern, is … 6,215…The 6,215 target is just that, with no details on the exact path it will take if the target is achieved, nor whether it undershoots or overshoots…the first potential support level is last month’s high at 5,880.”
– Monday Morning Outlook, Nov. 11, 2024
“…the SPX has experienced a second ‘island reversal’ in the past two weeks. First a bullish reversal, and now a bearish reversal. In the shorter term, this signals the potential for bearish follow-through price action in the coming days. Plus, Friday’s closing candle held the 20-day moving average, which aligns with October highs.”
– Monday Morning Outlook, Nov. 18, 2024
The excerpts above are intended to give you a glimpse into the major S&P 500 Index (SPX — 5,969.34) technical underpinnings we are observing as we near Thanksgiving and the final month of 2024. First and foremost, the bullish inverse “head and shoulder” breakout from September remains “in play,” with a targeted move to 6,215 by year end.
But as cautioned, there is nothing about the path the index will take if, in fact, this target is achieved. For example, a bearish island reversal occurred two weeks ago, threatening to undercut the bullish tendencies of the inverse “head and shoulder” breakout from mid-September.
In mid-October, prior to that development, the SPX experienced a near bearish “outside day” candle that predicted a pullback to the 50-day moving average (as loyal readers of this commentary know, bearish “outside day” candles have led to multiple pullbacks throughout 2024).
But the Nov. 15 candle that produced the bearish “island reversal” marked the low, as support from the October high at 5,880 worked with the SPX’s upward-sloping 20-day moving average before the Nov. 15 gap lower was filled last week, indicating the bulls remain in control.
With bulls seemingly in control, there is work to be done on the rally from short-term support. The mid-November closing and intraday high in the vicinity of 6,000-6,008 is overhead. Plus, as Schaeffer’s Senior Market Analyst Matthew Timpane discussed last week, not only is the 6,000 a key round psychological millennium level for the SPX, it is also a major 161.8% Fibonacci extension of the July peak and August low.
In fact, per the table below, many U.S. equity benchmarks are battling potential round-number resistance. Plus, Bitcoin (BTC) and the CBOE Market Volatility Index (VIX — 15.24) are trading in the vicinity of round numbers, with 15 being considered round-number support for the latter.
The importance of the 15 level for the VIX in 2024 is seen in the chart below. It acted as resistance in late May ahead of a huge rally in the SPX. In addition, the July, August and September bounces from 15 signaled short-term trouble ahead for the SPX. This means bulls would like to see a sustained move below the VIX 15 level, longer than that which occurred earlier this month.
Options bulls face a couple of risks in the short term as multiple indexes test round, psychological levels. First, the VIX is nearing a level those seeking portfolio insurance might find attractive if using SPX put options, with the implication that increased hedging activity among those perceiving options to be cheap could create a headwind.
Plus, a measure of short-term traders’ moods is moving higher again from an extreme low (lows indicate optimism among speculative option buyers, who are usually wrong at key turning points). The behavior of the SPX’s 10-day, buy-to-open put/call volume ratio looks like that of last month, which preceded a short-term pullback to the SPX’s 50-day moving average. This could imply another decline to a support level that wrings out an excess of optimism among short-term equity option buyers.
As of now, these are risks that you should have on your radar in the days ahead. In the absence of the SPX breaking below a support area, the risks take on less meaning, but this could change quickly.
I expect that any pullbacks will be shallow, since there is a large short position on the SPX that has been prevalent this year, as many thought the narrow-based rally would give way to overall market weakness. However, a broadening number of stocks is now participating in this rally and shorts may look to cover losing positions, if given what is perceived to be an opportunity on a pullback.
Todd Salamone is the V.P. of Research at Schaeffer’s Investment Research.
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