December 2018 Selloff Could Offer Stock Market Clues

Both December 2018 and 2022 saw sharp expiration week selling at key put strikes

Senior Vice President of Research
Dec 19, 2022 at 10:03 AM
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“…the SPX comes into this week at an area of potential support between 3,900 and 3,950. A risk is the close below 3,950, as it represents a breakdown level in September below a trendline that connected higher lows during a counter-rally from June through early-September … Additionally, the SPX’s break below 3,995 on Tuesday could be viewed as a win for the bears, as this was the site of a trendline connecting higher lows since October…  And remember the trendline that marked the recent highs is still in play, as it comes into the week at 4,050 and ends the week at 4,041.”

          - Monday Morning Outlook, December 12, 2022

December expiration week proved to be a roller-coaster ride when gauging the S&P 500 Index’s (SPX -- 3,852.36) price action. Beginning with Tuesday morning’s post-Consumer Price Index (CPI) reactionary high well above the 4,000-millennium mark, the ride ended with a sharp, fast decline throughout the rest of week.

The Tuesday, Dec. 13 intraday high was at a familiar level if you are a chartist. Not only was it the site of the Dec. 1 high, but two trendlines that I have made a focus of this commentary came into play, per the chart below.

The first is the trendline that has proven to be a thorn in the side for bulls since the peak in January that has connected all major lower highs. The second is an extended trendline connecting higher lows since mid-October. The beginning point of the latter trendline is coincidentally the bullish outside day candle that occurred after the release of the September CPI reading. These trendlines both came into play shortly after the release of the November CPI data that came in below expectations. The SPX moved above both these trendlines intraday, but also losing below both.

SPX 30-Day MA

“.. this is a week chock full of potentially significant market-moving events, with the SPY and SPX coming into week the just above key levels on a chart, it doesn’t eliminate the risk of option-related selling occurring. If technical levels are broken in response to this week’s monetary and economic data, selling related to a technical breakdown could precede selling related to options open interest…With the ‘known, unknowns’ in the week ahead (known events, unknown outcome), and the Cboe Market Volatility Index (VIX—24.23) coming off a multi-month low just over one week ago, a hedge to your long positions using SPY puts or VIX calls is worth considering as we head into a potentially volatile expiration week and year end.” 

          - Monday Morning Outlook, December 12, 2022

U.S. retail spending and manufacturing weakened in November, signs of a slowing economy…The Fed on Wednesday raised its benchmark interest rate 0.5 percentage point to a 15-year high and signaled plans to continue lifting rates through the spring. Fed officials have increased rates at the fastest pace since the 1980s”

            - The Wall Street Journal, December 15, 2022 

Per the excerpts above - my concluding remarks from last week and a summary from The Wall Street Journal highlighting the major market-moving news. One should not have been caught totally off guard by what transpired in terms of last week’s volatility, especially as it related to it being standard expiration week in the final month of the quarter and year.

While a SPDR S&P 500 ETF Trust (SPY --383.27) put hedge last week might have benefitted you, if there were any surprises, it is that a hedge using Cboe Market Volatility Index (VIX—22.62) futures would not have benefitted you. For example, the December VIX futures contract (VXc1) closed lower last week despite the 3.5% decline in the SPX.

With the Fed continuing to raise rates at a historically fast pace and warning in its new projections that peak rates next year could be higher than expected, market participants sold as they digested economic data during the week that suggested the economy is cooling abruptly. It reminds me of December 2018, when the Fed was raising rates and worries about the economy surfaced as China-U.S. trade tensions began boiling.

Both December 2018 and December 2022 saw sharp selling during expiration week, likely due to big put open interest strikes acting as magnets after technical levels on a chart were broken. In this case, the SPY’s put-heavy 380-strike came into play Friday, likely acting as a magnet up until the afternoon.


However, the 380 put strike was not breached. An unwinding of short positions related to the 380-strike put open interest likely led to the late-afternoon rally when it was evident that market participants were not going to push the SPY below 380. With time working against the buyers of those puts, short covering related to the 380-strike put open interest would have been supportive of the SPY late in the day.

I find it interesting, per a comment I made on Twitter late Friday morning, that the SPX found support in the area between 3,837 and 3,850, with the former level coinciding with 20% below its all-time closing high and the latter level representing the close when President Joe Biden took office, both of which are annotated in the SPX daily chart above.

In another parallel to 2018, the SPX comes into the week just above its 36-month, or three-year, moving average. Coincidentally, this long-term moving average marked the approximate lows in December 2018.

Per the chart below, the SPX has found support in most instances at its 36-month moving average (currently at 3,858) this year, but the 12-month, or one-year, moving average, has been resistance since August. The 12-month moving average is currently sitting at 4,080.

A monthly close below its 36-month moving average would be viewed as a major red flag for bulls as we enter 2023.


There was technical damage last week, particularly with the SPX breaking below 3,900. This suggests lightening up on long positions, at least until the SPX moves back above the trendline connecting lower highs since its January peak. This trendline comes into the week at 4,038 and ends the week at 4,025. Formerly, I was using the 3,900 level as a green light to build long exposure, but with the 2022 trendline that has marked so many peaks sitting not far above 3,900, I don’t think there is enough reward in using this level to increase your allocation to equities.

The good news is the SPX is sitting atop its 36-month moving average, which has been supportive throughout the year. And if December 2022 continues to resemble December 2018, the SPX will bottom before Christmas and rally strongly into 2023. As I said last week, continue to stick to levels I have discussed to help guide you in future decision making in this wild market environment. And strongly consider using options to reduce your dollar exposure and play both sides of this market in a leveraged manner.

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

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