“I would not be surprised to see a short-term bounce before a potential fade early in the week…Three key areas throughout the past week were giving us potential signs that we could see a risk-off move…First, there was resistance at 4,600. Then, the short-term downtrend line that the SPX has been unable to sustainably move above, as highlighted last week. Finally, the 125-day moving average has been capping the index. This is the same trendline that marked recent October lows. Bulls would welcome a confirmation candle above these levels to solidify that late January was indeed the bottom for stocks.”
- Monday Morning Outlook, February 14, 2022
In last week’s commentary, my colleague and Senior Market Strategist Matthew Timpane highlighted a few concerns with respect to the S&P 500 Index’s (SPX — 4,348.87) failure to rally above technical levels in the prior week. Such levels have been a point of emphasis in prior commentaries and, based on February expiration week price action, they are still worth monitoring as we look ahead.
For example, last week’s early bounce that Matt correctly anticipated was met by resistance levels that should be familiar to you by now. Specifically, Wednesday’s high in the 4,475 area was the site of a downtrend line in place since the early-January peak. Plus, some of you might remember that 4,475 is double the SPX's March 2020 closing low. Those anchoring to that low may make buy and sell decisions around this level and, last week, sellers emerged as they perceived a doubling from the March 2020 closing low as an opportunity to de-risk.
In fact, that would be a natural point to anchor to, especially for those bringing the Federal Reserve into their “buy/hold/sell” decision-making. Whereas the Fed became aggressively accommodative to support markets in early 2020 – thereby lending a big hand in the SPX’s March 2020 trough – the “Fed put” is being perceived by some as a thing of the past, since inflation numbers have persisted longer than anticipated. This caused the Fed in late September to pivot toward a more hawkish stance, followed by a late-November announcement that it may have to speed up its shift.
Major equity benchmarks have struggled since these announcements, as investors re-assess risk with respect to the Fed moving to a less accommodative stance, inflation taking hold, and countries around the world responding differently to the pandemic.
“If 4,400 fails, we could see a swift move lower towards the 4,300 area, as well as the 260-day moving average, which coincides with the SPX’s newly formed lower rail in a price channel. This would be a logical point bulls should hold to maintain the uptrend, despite all the negative catalysts they’ve been dished recently.”
- Monday Morning Outlook, February 14, 2021
Matt also mentioned the potential for quick selling to emerge if the SPX 4,400 level was breached. That observation caused me to check in with the SPDR S&P 500 ETF Trust (SPY — 434.23) February open interest configuration, which is one-tenth the SPX.
My conclusion was the same as Matt’s in terms of the potential for accelerated selling to occur if there was a break of SPX 4,400, or SPY 440. A break below the SPY 440-strike, where put open interest was driven primarily by those who bought-to-open, was apt to spark delta-hedge selling.
Plus, this is usually a catalyst during expiration week that will dictate in what direction the options market may exaggerate a move. In this case, headlines related to the increasing threat of Russia invading Ukraine invited sellers in.
When the 440 level broke late Thursday, it was indeed a quick move down to the 430 level, or SPX's 4,300 by Friday morning, as Matt suggested could happen. This made sense because whereas the SPY 440-strike puts were predominantly bought-to-open by speculators and/or hedgers, the SPY 430-strike put open interest was created by a more even distribution of those buying and selling-to-open, lending more stability around this strike due to how this open interest was created. In other words, the put-heavy 440 strike ahead of expiration was more prone to destabilization, which occurred.
Moreover, those looking at charts, in addition to or in lieu of option activity, likely generated stability around 430, or SPX 4,300, too, since this marked the January lows and “retest” buyers emerged.
On the sentiment front, we have noted during the past few weeks that negative sentiment among short-term traders is at levels that have coincided with major troughs during the past few years. But one concern that I have is that after buy-to-open put/call volume ratios on both SPX and Nasdaq 100 Index (NDX — 14,009.54) components peaked near the end of January, these indices are slightly below the levels they were at when their respective ratios peaked. This is not normal and potentially indicative of longer-term investors overwhelming traders who bought the dips a few weeks ago.
Moreover, I am seeing evidence of traders losing faith, as these ratios appear to be in the early stages of turning higher, implying the market could be losing bids from shorter-term market participants.
So where does last week’s action leave us? The increasing number of bears, whether evident in various surveys or in the options market, have pressured stocks lower as the Fed transitions from an extremely accommodative policy. There have been various technical breakdowns from a short-term and intermediate-term perspective along the way. For a serious unwind of this negative sentiment to occur, the broad market must take out key resistance levels.
This starts with a trendline connecting lower highs since early January, which begins the upcoming holiday-shortened week at 4,460 and ends the week at 4,428. But other resistance levels linger above, mainly at 4,475, which is double the March 2020 closing low, and the 4,550 area, which is the site of the September highs before the first Fed pivot and its 125-day moving average. If the SPX continues to trade below such levels, bulls are at risk of bears growing bolder.
At the same time, there are levels major benchmarks need to slip below for bears to grow bolder. For example, the SPX continues to trade above the 4,289-4,300 area and its 260-day moving average, which approximates one year of trading on a daily chart and was supportive last week. SPX 4,289 is a round 10% below the 2021 close and a level at which buyers surfaced in late January. Finally, the 4,300-century mark has been a tough level to breach, marking bottoms in early October and late January.
Technology stocks have been an obvious culprit in the equity market weakness, as investors rotate out of growth stocks and into sectors such as energy, metals, and financials. But the 14,000-millennium mark was supportive in late January and late last week. Not only is this a round number, but it is double the March 2020 closing low. Resistance looms above at the 15,000-15,100 area, a round number and current site of its 200-day moving average.
Beware potential support levels on the NDX and SPX in the week ahead, but also be wary of rallies as trendlines connecting lower highs have been barriers to further advances.
The last thing on my radar is the recent return of Cboe Volatility Index (VIX — 27.75) futures options buyers. The 10-day buy-to-open call/put volume ratio is approaching 2.0 again. As you can see on the chart below, when this ratio gets to or above this level, higher volatility and lower equity prices usually follow. While the ratio is not yet at 2.0, it's quickly getting there.
Todd Salamone is Schaeffer's Senior V.P. of Research
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