SPX Support, Resistance Levels to Consider Post-Rally

Last week’s action was a net positive for bulls

“It bears repeating that during a delta-hedge selloff, technical levels are not on the radar of those engaging in option-related selling. If indeed delta-hedge selling played a large role in the decline last week, the market should right itself quickly, since this risk is now greatly diminished with standard expiration in the rearview mirror. A start would be the SPX trading north of 5,000, which is also the vicinity of its 80-day trendline. ”

          -Monday Morning Outlook, April 22, 2024

Two weeks ago, I warned that April standard expiration week was at risk of a delta-hedge selloff, with major broad market exchange-traded funds (ETFs) and indices trading around big put open interest (OI) strikes. Plus, other major put OI strikes were stacked below as potential magnets. The latter happens when put sellers are forced to sell S&P 500 Index (SPX – 5,099.96) futures to remain neutral when big put OI strikes come into view on SPX and SPDR S&P 500 ETF Trust (SPY – 508.26) options.

What followed was an expiration week decline, which I noted had the markings of delta-hedge selling in last week’s commentary. Even potential support from the unpopular, but sometimes important 80-day moving average, failed to hold. 

As an example of the importance of the 80-day trendline, note that it acted as support in May and August 2023. The SPX’s cross below it in September triggered a sell signal into the October trough. And the November cross above this moving average signaled a buy signal.

Notice, however, that the cross back below the SPX’s 80-day moving average on the Friday of standard expiration week was short-lived. The recovery was immediate, as the index closed above it just two days later. A successful retest of this trendline on Thursday preceded the mega-cap, earnings-related Friday rally.

Last week’s action was a net positive for bulls, as the break of 80-day trendline support appeared to be mostly related to delta-hedging selling, versus what (on the surface) looked like a major technical breakdown, if focused solely on the chart. For what it is worth, the Friday, April 19 low occurred just above the 4,940 level that is exactly 20% above the October 2023 closing low.

Continue to keep this trendline on your radar, as a non-standard, expiration-related break below it may have more technical meaning.

Last week’s rally that followed the expiration-week decline was encouraging, but there is still work to be done from a technical perspective. On Friday, the SPX closed just below the confluence of its declining 20-day and flattening 50-day moving averages in the 5,115-5,125 zone. Moreover, the 5,111 level is a 50% retracement of the March closing high and this month’s closing low. And finally, there is potential trendline resistance connecting lower highs in the first two weeks of this month. That trendline comes into the week at 5,135 and at week’s end will be around 5,110.

On the sentiment front, it appears retail investors were the first to get flushed out, with the American Association of Individual Investors (AAII) survey coming in with 33% bears and only 32% bulls.

But the jury is still out as to whether active investment managers will support the market in the coming weeks, or if they’ll use rallies like we saw last week to continue to reduce equity market exposure. The latest National Association of Active Investment Managers (NAAIM) survey indicated they reduced exposure during standard expiration week.

As such, the four-week moving average of their exposure continues to turn lower but is still above what might be considered a full fledge wash-out of equity positions. The risk is this group viewing last week’s rally as a selling opportunity to further reduce exposure.

Also, per the second chart below, equity option buyers continue to increase the rate at which they are buying puts relative to calls on SPX stocks. This presents a coincidental headwind, which could come into play this week as the SPX approaches potential resistance. If the SPX takes out resistance, there is a high probability that equity put buyers will slow their purchases, and what was a headwind could become a tailwind. 

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.

The VIX closed back below 15.40 on Friday, potentially hinting at lower volatility and higher equity prices in the days ahead. If you are using this one indicator to emphasize a bullish outlook, keep your stop tight and consider closing your bullish emphasis if the VIX closes back above 15.40.

Todd Salamone is the Senior V.P. of Research at Schaeffer’s Investment Research.

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