“…with the SPX at the round 5,500 half-millennium level that coincides with the area of its 30-day moving average, the SPX will have to ‘right itself’ quickly in the week ahead…If the SPX falls below its 30-day moving average, equities are at increasing risk of additional selling over the next month and perhaps into the election”
– Monday Morning Outlook, July 22, 2024
For the first two days of last week, it appeared the S&P 500 Index (SPX-5,459.10) had “righted’ itself quickly, with a 1.5% rally from the support level discussed in the excerpt above. But the Tuesday intraday high would be it, as the SPX gapped below support Wednesday morning on the heels of notable negative earnings reactions from mega-caps Tesla (TSLA), Alphabet (GOOG), and Visa (V).
By Wednesday’s close, the SPX found itself sitting right on the next level of potential support from its 50-day moving average, but both the open and close on Thursday were below this moving average. A Friday morning rally driven in part by benign inflation data — core personal consumption expenditures (PCE) — pushed the SPX back above this moving average.
In the chart below, you can see the May low occurred at the intersection of the 30-day and 50-day moving averages, and the latter acted as a brief resistance level in late-April. This has shown to be of importance on several occasions this year. The bad news is that sellers emerged just short of the 5,500 level in Thursday and Friday’s trading with highs in the 5,490 area both days.
As such, the first level of potential resistance in the week ahead is the 5,490 – 5,510 area, with 5,510 representing the level that is 20% above the July 2023 that preceded a correction. Another potential resistance level is at 5,555, or the close ahead of last Wednesday’s morning gap lower.
Bulls will attempt to regain control in the week ahead with the SPX closing back above its 50-day moving average on Friday. This followed a near “round trip” move last week back to its 5,375 close ahead of the mid-June gap higher in response to favorable Consumer Price Index (CPI) data that coincidentally occurred on a Federal Open Market Committee (FOMC) decision day. An optimist might conclude that the bears did not have enough power to push the SPX to that mid-June close at 5, 375 and fill that gap.
Looking ahead to this week, multiple earnings will impact individual equities, with mega-caps Advanced Micro Devices (AMD), Microsoft (MSFT), Amazon (AMZN), Meta Platforms (META), and Qualcomm (QCOM) potentially influencing the direction of large-cap tech. This will be just as Tesla (TSLA) and Alphabet (GOOG) did last week.
At the macro level, Wednesday brings a data point related to inflation – the second quarter employment cost index – and a Federal Open Market Committee (FOMC) day.
If selling continues in the week ahead, a break of the 50-day moving average puts the SPX at risk of a move into the 5,250-5,290 area. The SPX’s 100-day moving average, which was nearly touched at the April low, resides at 5,290.
“The decline last week occurred as option buyers on SPX component stocks are at their most enthusiastic since this time last year, as measured by the 10-day, buy (to open) put/call ratio…the current reading of this ratio is at the level that preceded a three-month SPX decline from late-July through late-October last year…A difference between July 2023 and the present is whereas short covering partly drove stocks into the July 2023 high, this year’s market has been accompanied by shorts building positions. As such, total short interest now is almost 20% higher on SPX components relative to last year, which means the potential for short covering support is higher now than last year”
– Monday Morning Outlook, July 22, 2024
The upcoming week comes with a mixed bag of sentiment measures. On one hand, and mentioned last week, equity option buyers on SPX components were showing optimism ahead of the former break of support and they are now unwinding that optimism, which usually comes with weakness in the market.
But unlike July 2023, when the first half of the year’s rally was build on short covering, this year’s rally has occurred concurrent with a short interest build, implying there is more potential support from covering activity now relative to last year.
The question is, “Will the shorts view the pullback as a time to exit losing positions, or will they grow even more bold?” Per the second chart below, there was a little bit of covering in the first half of July as the SPX made new high after new highs, which is encouraging for bulls. But with the SPX now below June’s month-end close, there isn’t as much pain being felt relative to the first half of this month.
Finally, per the last chart below, I find the CBOE Market Volatility Index (VIX-16.39) peak last week as encouraging for bulls. The VIX has a quirky way of respecting round percentage levels above or below a significant high or low, or a round year—to-date percentage level.
In last week’s case, note that it peaked around 18.68, which is 50% above the 2023 close. In April, when the SPX troughed, the VIX also peaked around this area on a closing basis. If there is a close above 18.68, be prepared for more damage in the weeks ahead.
But if the SPX remains above its 50-day moving average and the VIX stays below 18.68 as we move through earnings season, it could signal that the shorts, or the shorts and corporate America via buybacks, are lending support to the market after a short-term technical breakdown last week.
Todd Salamone is the V.P. of Research at Schaeffer’s Investment Research.
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