“If we ‘zoom in’ on the SPX by analyzing a daily chart since November 2020, there is also evidence of potential resistance. … since positive headlines on a vaccine surfaced in mid-November, I have discussed a channel that this index has been trading in on most days… note that the SPX has been hugging the upper channel on this trendline during the past week. In fact, the price action around the top of the channel looks similar to mid-January and mid-February…With the ability to hedge a long portfolio now the cheapest in 14 months amid the risk factors I outlined, now might be the time to hedge long positions, as the momentum higher is the biggest factor on the bulls’ side right now.”
-Monday Morning Outlook, April 12, 2021
The bullish factor that I mentioned last Monday – momentum – continued during standard expiration week. For example, the S&P 500 Index (SPX — 4,185.47) bulled its way above potential resistance at the 4,131 level, which coincides with a round 10% year-to-date gain.
Moreover, it appears to be breaking a pattern evident earlier in the year, with multiple closes above a channel in place since mid-November. In fact, the SPX lows last week were at the top of this channel, in stark contrast to declines we saw in mid-January and mid-February.
With that said, potential support levels as we enter this week’s trading include 4,131 today, which is site of the level that corresponds to 10% above the 2020 close and the top of the channel. On Friday, the top of this channel resides at the SPX 4,150 half-century mark.
If you are long on this index or an equivalent, do not disturb positions unless the SPX falls back into its channel by week’s end. And if you want to give more room for a decline before acting, a move below 4,050 might be worth considering.
For what it is worth, since April 8, the SPX’s 14-day Relative Strength Index (RSI) – an overbought/oversold indicator – has been above 70. This is the longest period above 70, or overbought, since the Aug. 24 through Sept. 2 period, which preceded a pullback of 9% three weeks later to its 100-day moving average. The SPX’s 100-day moving average is currently sitting at 3,839, or 8.2% below Friday’s close.
From a longer-term chart perspective, I still have concerns about the SPX running out of fuel. The index is above 4,057, or six times its 2009 closing low and even pushed above the 4,140-level last week, which is a 161.8% Fibonacci retracement of last year’s high and low.
I looked at these 161.8% Fibonacci levels following recent bear markets or sharp corrective moves to see if there was any significance to those levels. What I found is worth discussing when analyzing strong advances following a 20% or more correction or bear market decline.
The 161.8% Fibonacci retracement level using the November 2018 intraday high of 2,940 and December 2018 intraday low of 2,346, a decline of 20%, was 3,315. The SPX stalled for a short period in this area in January 2020, pushed 2% above it in February, before finally succumbing to the pandemic-driven sharp selloff that I'm sure you remember quite clearly.
The 161.8 Fibonacci level of the 2007-2009 bear market high and low was 2,140. This level stopped the SPX dead in its tracks in May 2015, before going sideways for a few months. After trading as low as 1,810 in February 2016, the SPX finally pushed above 2,140 in July 2016, before the long-sustained move above it finally occurred in November 2016.
Finally, the161.8% Fibonacci retracement of the 2000 peak and 2002 trough was at 2,035. Once the SPX hit this level in November 2014, it went through a lengthy period of sideways action through early 2016 before clearing this level. For what it is worth, this area also marked three times the SPX’s 2009 closing low.
The jury is out as to whether the SPX finally succumbs to longer-term technical patterns that have put it at risk of selloffs in the past – whether it is a multiple such as six times its 2009 closing low, which I discussed at length last week, or the 161.8% retracement area of last year’s high and low, which was touched last week.
From a technical perspective, bulls should stay the course, as there has not been a technical breakdown to wash out the growing optimism that has helped fuel stocks higher. But that does not mean that the risks that I outlined last week and today have disappeared.
The recent ramp-up in Cboe Market Volatility Index (VIX — 16.25) futures call buying relative to put buying, discussed last week, is something that you should continue to have on your radar, as this has preceded volatility pops in the past. With the VIX closing at 16.25, it is below this year’s half closing high at 18.60, and just above 15.95, which is one-half last month’s intraday high of 31.90. A VIX move above 18.60 or a long period of support in the 16 area should put you on increased alert for a VIX pop.
Moreover, sentiment surveys, such as the Investor’s Intelligence (II) weekly survey of investment advisors, indicate optimism could weigh on the market soon. The bulls minus bears percentage came in above 40% for the second consecutive week, with 63% bulls and 17% bears among the respondents. This reading puts the bulls minus bears in the 90-99th percentile, and the expected returns historically are negative, per the red-shaded cells.
Finally, per the chart below, equity option buyers are nearing an extreme in optimism that has at best preceded choppy action and at worst preceded noticeable pullbacks.
In short, price momentum favors the bulls at present. But there is enough in place from both a technical and sentiment-based perspective that if a sharp corrective movement or extended decline occurs, you should not be taken by surprise. Have a plan to execute a hedge or a lightening up of long positions at first evidence that a pullback is underway, either by focusing on potential levels of support breaking down that I discussed earlier in the commentary, or the VIX moving above 18.60.
Todd Salamone is Schaeffer's Senior V.P. of Research
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