It was a winning week for stocks -- despite some brow-raising remarks from Fed Chair Janet Yellen, and simmering tensions between the U.S. and Russia. Monday's early pop higher aside, though, the week primarily consisted of a news-driven chop between support and resistance levels. With many of these key technical areas still in play, Todd Salamone takes a look at how the first quarter might conclude.
Finally, we close with a preview of the major economic and earnings events for the week ahead, plus our featured sector.
Notes from the Trading Desk: SPX Attempts to Finish First Quarter in the Green
By Todd Salamone, Senior VP of Research
"... The past two times that VIX call volume approached Friday's levels following a pop in the VIX, a VIX peak was in place (October 2013 and early February). Bulls can take some comfort in this fact, although there are no guarantees that the outcome of this upcoming event will be viewed as a positive for investors ... Additionally, the VIX enters next week's trading 50% above its 2014 lows, and many (not all) VIX peaks have occurred after advances of this magnitude off a key low."
"... a potential positive for bulls would be an 'unwinding' of the short positions related to the (expiring) put open interest, which could occur if the market stabilizes and sellers of the puts are at decreasing risk of the put options increasing in value ... Resistance is in the 1,848-1,850 area, with another layer of resistance around the recent high of 1,880."
-Monday Morning Outlook, March 15, 2014
"2.91 million, or 40% of all outstanding $VIX calls expired today. Call volume brisk, as investors replace expired insurance."
"$RUT struggles at round 1,200 level continue; Wilshire 5000 low in last half hour right around 20k mark $IWM"
-@ToddSalamone on Twitter, March 18 and 21, 2014
For the official record, it was a positive expiration week, with the S&P 500 Index (SPX - 1,866.52) closing 25 points, or 1.4%, higher. But for all intents and purposes, the expiration-week gains were confined to the first half-hour of Monday morning's trading, when markets surged higher following weekend events overseas.
Amid the choppy expiration-week trading, the last five days were filled with events, including the outcome of a highly watched geopolitical event (Crimea's vote to secede from Ukraine); a policy statement from the Federal Open Market Committee (FOMC) and new Chair Janet Yellen; results from the Fed on its annual U.S. bank stress tests (29 of 30 passed); Tuesday's expiration of CBOE Volatility Index (VIX - 15.00) futures options; and standard options expiration at the end of the week.
Each of these events exerted their respective influences during the course of the week -- but after Monday's strong opening that followed the weekend news from overseas, stocks went nowhere. In fact, per the graph of the popular SPDR S&P 500 ETF Trust (SPY - 186.20) below, note that Friday's close was near the top of Monday's opening bar.
With the market popping higher on Monday and doing the same on Tuesday, the VIX simultaneously imploded as some of the geopolitical uncertainty heading into the weekend was removed, putting in another peak at 50% above a key low in the process. With the 2014 VIX low located in the 12 region, the 18 area continues to be a potential level of resistance on VIX advances.
At Tuesday morning's settlement of VIX options, 40% of outstanding VIX call open interest expired, with 2.91 million of those VIX calls expiring worthless. Note that VIX settlement also corresponded with the SPY highs during the week, as short covering related to expiring VIX call open interest -- and equity index and exchange-traded fund put options expiring later in the week -- was replaced by fresh hedging activity in the VIX options pit, creating a headwind for the market by Tuesday afternoon.
From there, the market traded on news, declining after remarks from Fed Chair Yellen, only to rally once again on news of positive stress test results in the banking sector on Thursday. By Friday, the market was again influenced by expiration mechanics, with the SPY highs capped at 188.00 (which corresponds to SPX 1,880) -- the site of major call open interest that was getting ready to expire and also the highs earlier this month, which we discussed last week.
We're now heading into the final week of trading in the first quarter and, as mentioned above, the SPX was rejected Friday around the highs achieved earlier this month. Should follow-through selling occur this week, one level of potential support is 1,848.36 for those interested in seeing the SPX close the first quarter of the year in the green.
Meanwhile, two important benchmarks that we follow -- the Russell 2000 Index (RUT - 1,193.73) and S&P MidCap 400 Index (MID - 1,379.87) -- remain more firmly entrenched in the green this year, up 2.6% and 2.8%, respectively. However, round-number century levels continue to be speed bumps, with the RUT in particular having difficulty mounting a sustained move above 1,200 (roughly triple its 2009 low). As you can see on the graph immediately below, since early 2013 the RUT has spent weeks, even months, attempting to make sustained pushes through round-number century-mark levels. If the recent past is a prologue, we could see more of this choppy, frustrating trading in the days ahead. The MID made a new all-time high in Friday's session, but 1,400 lingers just above, representing double its corrective lows in July 2006 and the summer of 2010.
Finally, per the second chart below, the Wilshire 5000 Total Market Index (W5000 - 20,007.07) has a huge challenge of its own, as it trades in a choppy manner above and below the key 20,000 millennium mark.
As noted a week ago in this space, the short-term environment could remain choppy in the days ahead, as major benchmarks find support at breakeven levels on pullbacks, but do battle with overhead round-number resistance levels. For traders, this means you should either shorten or lengthen your time frames. For longer-term investors, caution remains prevalent amid a backdrop of strong price action, so stick to your bullish guns.
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