2 Key Levels of Support the SPX Just Broke Below

The VIX closed below a trendline connecting higher lows since early February

Senior Vice President of Research
Mar 14, 2022 at 8:54 AM
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If volatility expectations have limited upside, it likely means that some equity benchmarks could have limited downside, such as the S&P 500 Index (SPX -- 4,328.87), which continues to hold above the 4,289 level, or a round 10% below the 2021 close, and 4,300-century mark, which has been an area of multiple troughs since last July. The index’s 320-day moving average at 4,257 is another potential short-term support level.”

            - Monday Morning Outlook, March 7, 2022

Last week, I observed that volatility expectations, as measured by the Cboe Market Volatility Index (VIX -- 30.75), may have limited upside. This is because the 33.20-34.44 area (which marks double last year’s close and double this year’s closing low), had been capping the VIX. Moreover, VIX futures options buyers were not buying calls relative to puts at a rate that has typically preceded major upside moves in the index.

However, last Monday’s VIX settlement was the beginning of two consecutive closes above the area that had been acting as a resistance zone. With that, the S&P 500 Index (SPX -- 4,204.31) broke below key levels of potential support, beginning with the area between 4,289, or 10% below the 2021 close (which is 4,300), which has been supportive since the middle of last year. Moreover, the SPX broke below its 320-day moving average, a trendline that has acted as support occasionally, most recently in 2016 and 2019.

MMO1mar13

Indeed, the VIX proved to have limited upside last week. In fact, its Friday settlement was below its previous week’s close, and significantly below the key 33.20-34.44 area.

Might the VIX be indicating lower volatility and a friendlier period for stocks in the weeks ahead, as the Federal Open Market Committee (FOMC) gets set to begin raising rates this expiration week, amid high inflation numbers?

Something bulls can hang their hats on is that the VIX closed below a trendline connecting higher lows since early February. This could be a bullish signal for stocks and a sign of lower volatility ahead, just as the VIX’s break above a trendline connecting lower highs in early November signaled higher volatility ahead and with it, a challenging period for stocks.

“At the same time, the top rail of a downward channel that defines potential resistance means limited upside, should sellers continue to surface on rallies into this trendline. Even further, this move has become more defined since the SPX’s peak two months ago. The top rail of this channel begins the week at 4,434 and will be at 4,397 at the close this Friday, which is also around the SPX’s highs last week”

            - Monday Morning Outlook, March 7, 2022

Wednesday’s rally, which was immediately greeted by sellers on Thursday and Friday,  confirmed that technical barriers overhead suggested limited upside, per the excerpt above. However, the technical resistance came from what was supposed to be support levels before the start of trading last week. Therefore, the technical backdrop on the SPX favors the bears, since the index is trading below: a) its 320-day moving average, b) the 4,289 level which is a round 10% below last year’s close, and c) the 4,300- century mark. Even if buyers push the SPX back above these levels, another source of resistance comes into play from the top rail of its channel, referenced last week and as seen in the chart below. The top rail starts the week at 4,388 and ends the week at 4,351.  

MMO2mar13

But not all hope should be lost for bulls, as there was a potentially bullish development last Tuesday when the SPX made a new closing low for 2022, but its 14-day Relative Strength Index (RSI) came in above its reading prior to the SPX’s closing low on Feb. 23. This is known as a bullish RSI divergence, as the SPX’s new closing low was not confirmed by a new low in its RSI reading.

If the SPX closes back below 4,170, this could be considered a false bull signal, which is a growing likelihood after Friday’s bearish outside day. In this instance, the SPX’s high and lows were above and below the previous day’s highs and lows, with a close below the previous day’s bottom.

We enter March expiration week with many crosscurrents. Sentiment indicators still suggest the potential for a bottom to be in place, and the VIX is behaving in a manner that suggests lower volatility and higher stock prices could be ahead. But price action in major equity benchmarks is hardly squeezing the bears, nor forcing those on the sidelines back into the market.

If you make commitments to the long side, be selective (emphasize the few stocks showing strong price action amid negative sentiment), or tiptoe in with small dollar amounts, if playing a broader market index. Especially since the technical backdrop still favors the bears and is thus supportive of the negative sentiment we are seeing in various surveys, polls, and put/call volume ratios.

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

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