Frustration for Bears Looms as SPX Continues to Avoid Setbacks

Noting the most boring action seen in the SPY and SPX over a multi-day period since early August

Senior Vice President of Research
Nov 22, 2021 at 8:51 AM
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“…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…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.”

          - Monday Morning Outlook, Nov. 15, 2021

In last week’s commentary, Schaeffer's Senior Market Strategist Matthew Timpane discussed price action in the SPDR S&P 500 ETF Trust (SPY -- 468.89), with comments about peak call open interest at the 470-strike acting as a lid. The SPY 470 strike aligns with the round 4,700 century mark on the S&P 500 Index (SPX -- 4,697.96), the index that the SPY replicates.

While the SPX grinded higher during November expiration week, its 4,700-level continued to act as a lid for the most part, with the century mark being touched daily, Tuesday through Friday. But there was never a sustained move through it, with the action best described as a narrow chop around this level. In fact, it was the most boring action that we have seen in the SPY and SPX over a multi-day period since early August, which preceded a mild pullback.

But as Matt said last week, the bulls remain firmly in control, as the SPX remains in a bullish one-year channel, after a recent period in which it spent more than a month below the channel. It was during that time that many strategists turned bearish, as investors began to fret over the Fed clueing them in that tapering of their bond purchases was likely on the immediate horizon, as well as the likelihood of interest rate hikes toward the end of next year. But since the early-November tapering announcement and a “hotter-than-expected” consumer price index (CPI) report one week after the Fed meeting (that bumped up the timeline for a rate hike in some investors’ minds) the SPX has not experienced a setback of any significance, a plus for bulls and an added frustration for bears.

With the SPY call barrier at the 470-strike removed due to standard November expiration, the odds increase for the SPX to break out above the 4,700-century mark. If a pullback is in the cards during this shortened holiday week, the lower rail of the bullish channel are the first levels of potential support between 4,680 today and 4,692 on Friday. But even if the lower rail of the channel is breached, the damage could be minimal if other potential support levels are able to hold. For example, the area between 4,536, the August peak, and the SPX’s advancing 30-day moving (currently at 4,588), are levels that I could see a “buy-the-dip” mentality surfacing.

A first level of resistance is this month’s intraday high of 4,718.50. Admittedly, one thing still weighing on my mind is the three-day pattern on Nov. 5 (a Friday), Nov. 8, and Nov. 9. These three days are not officially a bearish “tri-star doji” pattern (which has preceded bearish short-term moves this year). However, the two consecutive doji -- a daily candlestick in which the open and close are the same or nearly the same -- days followed by the SPX’s close at its low on Nov. 9, may still be a risk factor worth being cognizant of, as the SPX is below the Nov. 8 close that was part of the three-day pattern I am talking about.


While the trading week may be light due to the Thanksgiving holiday, it is heavy on retail earnings, which will give investors more to weigh with respect to the impact of recent Covid-19 outbreaks, supply-chain disruptions, and the resultant inflationary impact on consumers. 

Among those companies in the retail space reporting are Urban Outfitters (URBN), Abercrombie & Fitch (ANF), American Eagle Outfitters (AEO), Best Buy (BBY), Dick’s Sporting Goods (DKS), Dollar Tree (DLTR), Gap (GPS), Guess? (GES), and Nordstrom (JWN). This is on the heels of the SPDR S&P Retail ETF’s (XRT -- 101.05) breakout above January through October resistance in the 95 area earlier this month.

“…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.”

            - Monday Morning Outlook, Nov. 15, 2021

On the sentiment front, even amid the stronger-than-expected CPI report in mid-November that may have turned the tide against bulls, investors have not hit the panic button. In fact, the NAAIM reading came in above 100 for the fourth consecutive week.  A rollover in this number combined with a break of technical support would be cause for concern for bulls, but neither has occurred.

Another encouraging sign for bulls in the days ahead is the action of option speculators. Despite the SPX less than five points below its all-time closing high, the 10-day buy (to open) put/call volume ratio on SPX still has room to decline to its lowest ratio of the year. That said, the reward for bulls in the short term may not be as great as compared to when the ratio was rolling over from its peak a few weeks ago.


Finally, the CBOE Market Volatility Index (VIX – 17.91) is one to watch for potential clues on whether we are on the verge of higher volatility. Per the chart below, I find it interesting that as volatility expectations increased a bit last week, the VIX did not close above a trendline connecting higher lows from June until early September, a period when volatility tends to increase from a seasonal perspective.

I would think that the first hint of trouble ahead for bulls would be a close above this headline, even though the last VIX surge above it proved to be the day of its peak. In fact, bulls may view the Friday reading as bullish, with room down to the 15 area, which has tended to be a floor.


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

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