Why SPX, NDX Pullbacks Could Be Buying Opportunities

Investors should watch for SPX “tri-star doji” candlestick patterns

Senior Vice President of Research
Oct 25, 2021 at 9:05 AM
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…while the Nasdaq-100 Index (NDX – 15,146.92) component 10-day, buy-to-open put/call volume ratio has not yet rolled over, bulls might take some solace in the fact that, amid less technical deterioration than the SPX during the past decline, this ratio is around levels that have marked peaks multiple times in the past three years.”

          - Monday Morning Outlook, October 18, 2021

Despite social media stocks taking a hit last week after disappointing earnings from Snap (SNAP), which was attributed to a drop in advertising from those with little to market and Apple’s (AAPL) privacy changes, large-cap technology names remain attractive. My observation on Twitter last Tuesday was in reference to Nasdaq-100 Index (NDX – 15,355.06) components, which showed that options buyers were finally in the early stages of throwing in the towel on increasingly bearish bets in the options market.  

I found this noteworthy after highlighting over the last few weeks that the most bullish conditions tend to occur after the 10-day buy-to-open put/call volume ratio rolls over, implying pessimism has climaxed and is beginning to unwind. Unwinding can happen in the form of option speculators buying less puts and more calls on component stocks, and could also signal that those trading equities are covering short positions and/or accumulating long positions more aggressively than selling.

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Given that the NDX did not experience a technical breakdown (in terms of channel support and the 120-day moving average) of any significance during its September pullback from all-time highs, the high level of pessimism continues to have bullish implications. With a climax in pessimism occurring earlier this month, and amid the unwinding of this negative sentiment, bullish conditions persist. Thus, pullbacks like Friday’s should be viewed as buying opportunities over the coming weeks, even if there is potential technical resistance overhead that could create speed bumps along the way.

Specifically, the all-time closing high of 15,675 could be greeted by sellers looking for a rally to this level as a second chance to reduce risk. Note below that the NDX is currently flirting with a level that is 20% above last year’s close, which resides at 15,465 and was the vicinity of last week’s high. Support is in the area between the mid-August intraday low of 14,775 and 15,000, a psychological round number that acted as short-term resistance when touched for the first time in mid-July.

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Similarly, the S&P 500 Index’s (SPX – 4,544.90) component 10-day buy-to-open put/call volume ratio is declining from its highest level in more than a year. This has bullish implications as well. 

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The SPX is trading back above the 50-day moving average and 4,475 level, which is double the 2020 closing low. Though last week it hesitated around the early-September highs, this isn’t a big surprise. With traders still unwinding bearish bets from earlier in the month, there is a good chance that the SPX could take out previous highs and make a run at the lower rail of that channel that was in place from mid-November 2020 into mid-September. The lower rail of that channel comes into the week at 4,590, and on the last trading day of October will be at 4,607.

A first area of support resides between 4,445 – its 50-day moving average – and 4,475, which is double its 2020 closing low. Another area that could act as support if a deeper pullback occurs is between 4,390, which is the site of the trendline breakout above September’s lower highs, and 4,420, which is the site of its 80-day moving average.

With a doji day on the SPX on Friday, which occurs when the open and close are exactly or just about the same, I am watching today and tomorrow for a repeat of the bearish “tri-star doji” candlestick pattern that has been prominent at or near short-term tops in the market this year. This pattern forms after three consecutive daily dojis.

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Finally, I find it interesting that amid uncertainties in Congress regarding budget reconciliation, a potential Federal Reserve tapering in November, broken supply chains, the potential inflationary effects, the possibility of other Covid-19 variants emerging, and the heart of the earnings season coming up this week, that the CBOE Market Volatility Index (VIX – 15.84) closed at a calendar year low on Thursday, on the heels of the SPX’s closing high.   

Low levels of volatility expectations may not persist, but Thursday’s low is encouraging for bulls.  At the very least, it means that hedging is inexpensive relative to the past instances in 2021, should you feel the urge to hedge at a time that the SPX probes its September peak amid those uncertainties.

Todd Salamone is Schaeffer's Senior V.P. of Research

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