What Traders Could Experience During 2021 Holiday Seasonality

Last week’s CBOE Market Volatility Index spike spooked many traders

CMT, Senior Market Strategist
Nov 15, 2021 at 8:45 AM
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Equities stumbled a bit this past week as the Invesco QQQ Trust (QQQ – 394.70), which emulates the Nasdaq 100 Index (NDX – 16,199.89), ran into the round $400 level. In the past, the Nasdaq has found resistance when nearing round century levels in the QQQ ETF Trust. The 400-strike also happens to be the peak call level for QQQ, and as we know from past observations, these open interest levels can also act as resistance.

Likewise, the SPDR S&P 500 ETF Trust (SPY – 467.27) also traded right up to the $470 level where its peak call level resides. So, it wasn’t a surprise when the markets stalled. But this isn’t, in itself, a reason to get bearish on markets just yet either, as we’ve alluded to in prior weeks that bulls remain firmly in control. 

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With the S&P 500 Index (SPX – 4,682.85) checking back, it has managed to hold the lower rail of the price channel that it recently regained, and neither the S&P 500 nor the Nasdaq have broken below their 20-day moving averages. That being said, if we break the respective peak call levels mentioned above, we could be in a full-on melt-up into the holiday season with positive seasonality tailwinds at our backside.

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For the time being, traders can again use the rails of that channel to define potential support and resistance levels in the immediate term, unless and until these boundaries are no longer effectively defining short-term support and resistance areas. The top rail of this channel comes into the week at 4,766 and ends the week at 4,785. The bottom rail is at 4,634 today and will be just above 4,650 on Friday.

Monday Morning Outlook, Nov. 8, 2021

However, if we do break down heading into expiration week, we might get the opportunity to buy equities at more favorable risk/reward levels. The first level I would look to for potential support level if we break the lower rail that sits around 4,650 would be around the 4,544 level where we broke out from the early September highs in the S&P 500. On the Nasdaq 100, I would look for prior highs to hold around the 15,675 level. A worst-case scenario outlook for the week would be trading down to the SPY peak put for November expiration that resides at the 440-strike, while the QQQ peak put is resting at the 380-strike, respectively, and right near the prior breakout level.

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Whether it is seasonality, or a continued unwinding of the pessimism that emerged in September – or a combination of both – from a technical perspective the bulls remain in full control. But as I mentioned last week, the one thing in the options market that I’m monitoring closely is the action of CBOE Market Volatility Index (VIX -- 16.48) futures options buyers, who ahead of last week’s Fed meeting, were buying calls on VIX futures at a rate higher than usual. Since last week, the rate has dropped off a bit. Such a high rate of call buying relative to put buying has tipped off volatility spikes.

- Monday Morning Outlook, Nov. 8, 2021

Moreover, last week’s CBOE Market Volatility Index (VIX -- 16.29) spike spooked many traders as it recently had found support near the 15 level and looked to be heading to test 2020 closing prices up near 22.54. Then, the VIX retreated into the weekend, but we might not be out of the woods just yet. Typically, when we see the 10-day VIX and SPX correlation spike past 0.50, it’s a warning signal that we could be at least in a short-term topping process that consolidates or pulls back slightly. Although, at other times, it can amount to a larger pullback, but we need further evidence to confirm it’s not just a dip-buying opportunity.  

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Since I only drop in every so often, I’d like to touch on some longer-term trends I’m seeing. The first thing is that we are finally starting to see some breadth expansion, which had been lagging in the market, but the other week we got a few signals that larger participation is now starting to happen. And, while we’d like to see things like S&P 500 Equal-Weight vs. Market Cap Weighted relative ratio chart bounce or for the Nasdaq Advance-Decline to catch up and breakout to new highs, we are not quite there yet.

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However, we do have Dow Theory confirming the bull market. Transports caught a bid last month and rallied hard to finally breakout and now appear to be coming back to retest that breakout. Likewise, the Russell 2000 Index (RUT -- 2,411.78), which has been a large non-participant in this market, has finally broken out of its nine-month consolidation that it’s been in throughout most of 2021. Small caps also appear to be in the process of a retest of the breakout. As long as these levels hold, we need to remain bullish on the market from a technical perspective.

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From a sentiment standpoint, the markets are starting to get frothy as well, with the Nasdaq 100 buy-to-open 10-day put/call volume ratio approaching its lower range. But don’t count out a move lower to year-to-date lows as we continue to burn off the pessimism from late September. While risks are rising, this time of year is ripe for a push to extreme optimism levels. Furthermore, the National Association of Active Investment Managers (NAAIM) reading came in at 103.69 and just put in three straight readings above 100, marking it the first occurrence of this year. The last time this happened was in the first couple weeks of December 2020, and while this puts the reading in the extreme optimism zone, in 2020 we continued to grind higher for the next couple of months before experiencing a correction in the markets.

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One of the biggest mistakes I see traders make is getting bearish too early. Sure, risks are increasing, but more times than not, they will push to extremes past your expectations. This not only can drag on performance, but you’re also exposing yourself to the risk of ruin. We must weigh the evidence of the facts when allocating capital, and there will always be a risk. Still, we must remain diligent and place our bets on the data, and so far, that evidence is pointing towards prices still moving higher in the intermediate-term.

While I wouldn’t be surprised by a sideways or even a down week or two as we work through November OPEX, I would look at any possible sell-off as a buying opportunity. Short-term hedges might be something you may want to still consider for the next week or two as we work off overbought conditions. However, you should stay on the lookout for buying opportunities until the trend proves otherwise.     

Matthew Timpane is a Senior Market Analyst at Schaeffer's

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