When to Expect Consolidation for the Nasdaq-100 Index

We may be in store for a volatility pop as well

by Matthew Timpane

Published on Jun 29, 2020 at 8:35 AM
Updated on Jun 29, 2020 at 9:03 AM

MMO chart 1 June 29

The S&P 500 Index (SPX -- 3,009.05) and the Nasdaq Composite Index (IXIC – 9,757.22) both closed lower on the week following Friday's options expiration, which isn’t all that odd since seasonally the days following June expiration are historically bad for equity markets -- down on average 0.91% over the past 25 years. Looking towards July, we are starting to see some macro headwinds and technical implications pop up that could spur some volatility going forward. COVID-19 cases and hospitalization rates have continued to climb rapidly as the U.S. has reopened the economy, with nine states pulling back and delaying some of their phased reopening measures.

“If the SPX breaks its first line of support in the 2,985-3,000 zone on a closing basis, this might be enough to give short-term speculators the nerve to increase downside bets, creating a headwind for stocks in the process. If, however, last week’s lows prove to be a short-term trough, I would expect a rally back to last week’s high in the 3,230 area, followed by a volatile summer trading range that washes out the optimism among short-term traders at present.”

Monday Morning Outlook, June 15, 2020

From a technical perspective, the S&P 500 Index had been coiling inside its price channel and near a triangle apex all week, before finally breaking down late Friday. Luckily for bulls, an area we’ve mentioned before (the round 3,000-millennium level)  and the 40-day moving average were just below to save the day and act as support. Potentially, this push lower on Friday could have been a bottom, as it’s the second time we’ve tested these lows over the last two weeks. Bulls will be looking for a breakout type of move higher if this is the case. On the other hand, if we were to break the 2,985-3,000 zone this week, we could first see a swift move lower to the -10% YTD level at 2,932. And, if we breach that support, the 2,850 level is next on my radar, which was support back in 2019, and is an area the index struggled around in April and early May of this year.

MMO chart 3 june 29

MMO chart 4 june 29

"As the NDX represents larger-cap technology names, some of which have fueled this rally, I find it interesting that the 9,632 level is double its March 2000 peak, which the index struggled to surpass in 2015 and parts of 2016. This area acted as resistance in February and a dip below it earlier this month was immediately met with buyers. In fact, the 9,606 level is a round 10% above the 2019 close. While the 10,000 mark has put at least a temporary delay in this index’s momentum higher, a close below 9,600 could spark even greater selling in larger-cap tech names."

Monday Morning Outlook, June 22, 2020

Moreover, the Nasdaq-100 Index (NDX – 9,849.36) failed near the round 10,000 millennium level for the second week in a row, which coincidentally, is also at the top of the price channel that started way back in 2011. As we head through summer, I would keep my eye on the NDX as it might be a better barometer of overall market health as we work our way through this bifurcated recession. Consolidation should be expected here, and as we mentioned last week, the first support level to watch is the 9,600 level.

As also noted last week, a breach of that level could induce more selling to the next leg down support zone of 9,475 to 9,450. This also happens to be near the 23.6% Fibonacci retracement level and the point just before the large gap lower in February, where it held as support in mid-June. If this level were to fail as well, I’d expect we would see a trip down to the round 9,000 millennium level for next level of possible support, which proved to be a key pivot point as it has provided both resistance and support in the recent months. If all those fail, there is a strong case that downside momentum would bring us down to the 8,000 region, which proved contentious in 2019 and happens to be near the 61.8% Fibonacci retracement level. But, to see this happen, I imagine we’ll need a negative catalyst to blindside us unexpectedly.

"Finally, standard June expiration Cboe Market Volatility Index (VIX -- 35.12) futures options expired on Wednesday of last week. As I have noted before, volatility pops have been known to occur just after a plethora of call open interest disappears. With Friday’s VIX low at its 20-day moving average -- a trendline that provided resistance from early April through late May -- Friday’s low could be indicative of another pop into at least the 40-42 zone in the upcoming days."

- Monday Morning Outlook, June 22, 2020

The Cboe Market Volatility Index (VIX -- 34.73) continues to setup constructively as the 20-day moving average continues to cradle it, and on Friday, we saw an inside bar. For readers that are unfamiliar with inside bars, its when the current candle is within the high to low range of the prior day’s candle. Often these happen right before breakouts in either direction. Also, according to the most recent Commitment of Traders (CoT) report, large speculators have resumed shorting VIX futures. Although we’re still far from an extreme, if we see further shorting this week on perhaps a reflexive trade higher in equity markets near-term, this could be the fuel needed for a volatility pop.

MMO Chart 5 june 29

As we’ve noted in recent weeks, short-term sentiment indicators are still throwing up red flags with the 10-day, equity-only, buy-to-open put/call volume ratio once again turning lower, currently sitting at 0.42, and in extreme territory. This extreme also coincides with the massive surge in options volume as a whole that we’ve seen since the restrictions went in place due to COVID-19. The surge is widely believed to be caused by retail investors coming into the market in response to the lack of sporting and entertainment options available. In the past, it has been well-documented that these are typical signs of euphoria that tend to end badly for some.

MMO Chart 6 june 29

Furthermore, we run a hedging ratio by taking the index put/call ratio and dividing it by the equity-only put/call ratio, which tells us when market participants are hedging off their equity exposure through index options. This ratio is currently reading 2.93, which is just below it’s all-time-high even as we’ve pulled back in the equity markets. In simpler terms, this tells me that we still have a chance to see some summer fireworks, even if your local event is canceled this year due to the virus. 

Matthew Timpane is a trader at Schaeffer's Investment Research.

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