The S&P Trendline You Must Watch This Week

Overseas events, including Greek debt negotiations and an emerging bear market in China, could impact U.S. markets

Senior Vice President of Research
Jun 29, 2015 at 9:03 AM
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"In addition to the drama surrounding Greece, the charts present a few interesting situations. With the exception of the RUT, many equity benchmarks are trading just below previous resistance levels as we move into this week, which historically has been weak ... But the big question for those following the S&P 500 Index -- which remains locked in a range -- is whether or not the round SPX 2,100 level continues to act as a magnet, which has been the case since mid-February."

-- Monday Morning Outlook, June 22, 2015


Headlines that ebb and flow between a positive outlook and negative outlook on Greece striking a deal with its creditors ahead of its Tuesday, June 30, payment due to the International Monetary Fund (IMF) continue to drive markets day to day. Today, for example, Greek bank closures ahead of an expected default have sent global stocks sharply lower.

But as you can see on the graph below of the S&P 500 Index (SPX - 2,101.49), the market has gone nowhere during the month of June, as the magnetic 2,100 level continues to balance things out when the index deviates too far above or below this round level, which roughly equates to 210 on the SPDR S&P 500 ETF Trust (SPY - 209.82).
In fact, we have found it interesting that the 210 strike on the SPY tends to be the home of heavy call and put open interest from week to week, on both weekly and standard expiration options.


As discussed a few weeks ago, the negotiating tactics between Greece and its creditors, and their impact on the market, are strikingly similar to the "fiscal cliff" budget negotiations of late 2012. As headlines persisted about being on the verge of inking a deal, to the possibility of a budget deal not getting done, the SPX traded in a range, before finally exploding higher on the first trading day of 2013, after an eleventh-hour deal was struck.

So we enter another week in which the U.S. market will be impacted by overseas events. One event that we didn't discuss above is China, as the Shanghai Composite has declined more than 20% since mid-June, including a sharp sell-off on Friday and another big plunge today. With the situation in Greece heating up, will U.S. markets essentially ignore what is happening with China's market, as they did Friday?

Additionally, this week is a holiday-shortened week due to Independence Day, which will be observed on Friday. For options traders, your special treat is two expiration days -- quarterly expiration on Tuesday, and weekly expiration on Thursday, due to the markets being closed this Friday. For those that trade off economic data, here is your reminder that another potential market mover, the June employment report, will be released on Thursday. 

With many investors fixating on June 30, the deadline for Greece to meet its IMF obligation, I thought it would be interesting to see how the SPY open interest configuration stacks up for quarterly options expiring on June 30 and weekly options expiring on Thursday, July 2. As expected, put open interest is predominant, so favorable news related to Greece could create unwind short covering related to expiring put options, with potential resistance at call-heavy strikes from 213-215. But a negative outcome could push the SPY down to 205 relatively quickly, which is around its 2015 breakeven mark of 205.54. Both overseas and domestic events, compounded by two expirations within a week and a quarter-end, could spur a lot of volatility this week.    


In fact, we continue to focus on the CBOE Volatility Index's (VIX - 14.02) 15.53 level, which is half the 2014 peak and a level that has capped multiple VIX highs this year. That said, given that there is still a large short position among VIX futures players, plus the early stages of a build-up in VIX call open interest to protect these short positions after June VIX expiration -- and potentially thin volume during a holiday-shortened week, with a plethora of macro events and two expirations -- one could easily argue that the market is at a heightened vulnerability to a volatility pop that we haven't witnessed this year. So again, we advise having short exposure of some kind along with your long exposure.

"Nearly halfway through the year, the S&P 500 has moved in a compressed 154-point window. That's the ninth narrowest range for the large-cap index over the first six months of the year since 1928, according to brokerage FBN Securities ... For those years that saw narrower trading ranges to start the year, the S&P 500 rose, on average, 3.9% in the back half of the year. Only in one instance -- 1981 -- did the large-cap index decline in the last six months of the year."
-- The Wall Street Journal, June 24, 2015

Finally, with the end of the month imminent, we want to step back and look at the bigger picture, which means a longer-term, monthly SPX graph. As we do this, we want to keep the excerpt above in mind from The Wall Street Journal, which quoted research from FBN Securities on how the second half of the year has played out when a narrow range persists in the first half. A graph with the research showed that in seven of those years, the SPX went on to trade higher in the second half of the year. The only year it was in the red was 1981. 

In doing my own research, I found that in June 1981, the SPX experienced a monthly close below its 10-month moving average, after hitting an all-time high in late 1980 and using the 10-month moving average as support in prior months. The point being, where the SPX closes with respect to its 10-month moving average at the end of this month could dictate how the second half of the year plays out. Will it be a repeat of previous years in which the market trades higher in the second half of the year, following a narrow trading range in the first half? Or will the second half of 2015 be like the second half of 1981, when it traded lower after a monthly close below its 10-month moving average in June? The SPX's 10-month moving average is at 2,057.86 currently, which coincidentally is around the index's 2014 close of 2,058.90.  



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