These Price Points Could Define the Market

The levels traders need to watch in the S&P 500 Index (SPX), Nasdaq Composite (COMP), and Russell 2000 (RUT)

by Todd Salamone

Published on Aug 10, 2015 at 7:50 AM

"Going into this week's trading -- and from a round-number YTD percentage gain perspective -- the Dow Jones Industrial Average (DJIA - 17,689.86) is not far below its 2014 close of 17,823, which is a level to watch for clues as to whether or not a breakout in the range-bound SPX is imminent."

"Given the range behavior being exhibited, equity benchmarks run the risk of re-testing former lows during the dog days of the seasonally weak August. If stocks pull back, we see potential support for the SPX at 2,070, while the early July lows of 17,500 on the DJIA could be supportive, with risk down to 1,485 on the S&P 400 MidCap Index (MID - 1,502.89)."


-- Monday Morning Outlook, August 3, 2015

Going into the Friday employment report, stocks exhibited much of the same behavior that has been evident in prior weeks. Specifically, round numbers have acted as magnets during this grueling range and, moreover, year-to-date (YTD), round-number percentage gains continue to come into play, with the Dow Jones Industrial Average (DJIA - 17,373.38) declining after coming within less than one percentage point of its 2014 close to finish July. 

Meanwhile, the S&P 500 Index (SPX - 2,077.57), after closing July at 2,103, managed to touch the 2,100 level on four days last week. This magnet action around 2,100 last week is a microcosm of what we have observed since the SPX first touched 2,100 on Feb. 17. Through Friday’s close, the SPX has now printed 2,100 on 44 of the 121 trading days since it first hit 2,100 in mid-February, which is 36.3% of the days. If past is prologue, don’t be surprised to see a move back to 2,100 sometime this week. 

150807MMM

 

Not to be forgotten, the Nasdaq Composite (COMP - 5,043.54) has crossed 5,000 roughly one in four trading days since it hit this level in early March for the first time in 15 years. It probably isn’t a huge surprise that the COMP has paid a visit to 5,000 in every month since March, despite actually spending a majority of its time above 5,000 since late April. 

Based on last week’s action, it appears the COMP wants to visit 5,000 again in August, continuing a pattern of pullbacks to this millennium area that occurred in May, June, and July. Regardless, bulls might argue that the COMP has spent far more time above and around 5,000 relative to when it first hit this level in 2000, when the 5,000 area marked the beginning of the tech bubble burst.

150807MMM2

After the lagging Dow’s failure to rally back above its 2014 close, YTD breakeven levels remain potentially supportive on other indexes. In other words, if the COMP pulls back to its support area at 5,000, this could be coincident with benchmarks such as the SPX and Russell 2000 (RUT - 1,206.90) trading back to potential support at their 2014 closes, as follows:

            SPX - 2,058

            RUT - 1,204

The RUT’s 1,200-1,210 area is important. Per the chart below, note that the 2014 close just north of 1,200 has acted as support since March. Moreover, the round 1,200 level is important because it represents double its October 2011 low. The risk of a break of this support, which I am sure bears will quickly point out, is that it is also the neckline of a bearish "head and shoulders" pattern. This pattern will have targeted downside to 1,115 if it trades below the neckline, or 14% below the June high. 

150807RUT2

The above is in direct contrast with our SPX discussion last week, in which a breakout above 2,130 would complete a bullish inverse "head and shoulders" formation, targeting 2,205. With that said, an SPX close below the 2,065-2,070 area removes the possibility of this bullish pattern developing, and sets up the potential for a bearish "head and shoulders" pattern on a break below 2,040. If this occurs, the target would be 1,950, or 8.5% below the July high.

"… the sentiment backdrop indicates that declines will be minimal relative to the upside potential, unless negative sentiment extremes go through the roof."

-- Monday Morning Outlook, August 3, 2015

The targets discussed above are based on a breakout of resistance, or a break below support occurring. In the case of a move below support -- and as we discussed last week -- such targets are inconsistent with the current sentiment backdrop, which is suggesting minimal downside potential. In fact, in the days ahead of the Friday employment report, note that the buy-to-open put/call volume ratio on individual equities spiked from an already high level. 

Indeed, if the downside targets discussed above are achieved, it will likely be coincidental with negative sentiment extremes that we have not seen in the past few years. In fact, the current sentiment backdrop -- as measured by various surveys that we follow, and in the options market -- is more consistent with what we have observed ahead of major advances in the equity market.    

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