Why You Need Both Bullish and Bearish Exposure Right Now

The SPX did not test its “line in the sand” support area referenced last week

Senior Vice President of Research
Mar 27, 2023 at 9:27 AM
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For bulls, it was a good news/bad news week. On one hand, the support area highlighted in last week’s outlook held true for most of the week…But the S&P 500 Index’s rally off the week’s low stalled at the 3,940-3,970 area…With the SPX coming into the week below this key area for the second week in a row, I still maintain that there is significant risk in the market.. For now, my advice would be to remain cautious, with the SPX not only below the key 3,940-3,970 area, but also below a trendline that has surfaced in recent weeks that connects highs since the February peak. The trendline comes into the week at 4,035 and ends the week at 4,010..”

            -Monday Morning Outlook, March 17, 2023 

The S&P 500 Index (SPX--3,970.00) posted its second-consecutive week of gains, which one might view as impressive amid the turmoil in the banking sector and another rate hike by the Fed, who cautioned more are coming.

At the same time, little has changed. On one hand, the good news is the SPX did not test its “line in the sand” support area between 3,835 and 3,850 that I referenced recently (3,835 being a round 20% below the index’s all-time closing high, and 3,850 the level when U.S. President Joe Biden took office).

In fact, on a closing basis, the SPX held support from its popular 200-day moving average the entire week, currently situated at 3,932 and sloping lower by roughly one point each day. The 200-day moving average is also in the vicinity of the mid-September SPX breakdown at 3,940, below a trendline connecting higher lows in mid-June through early September. As you will read later, 3,940 has become a magnet of sorts since late February.

Like the prior week’s action, the good came with some bad for bulls, from a technical perspective. While support held at higher levels relative to the prior week, technical resistance I cautioned you about continued to cap rallies.

For example, the week’s highs came at the new trendline that has emerged connecting lower highs since the Feb. 2 peak. Moreover, the high at this trendline occurred just one day after a close above the key 3,970 level, which is where the SPX broke out in January above a trendline connecting all major lower highs in 2022. The SPX declined below 3,970 on Wednesday and Thursday, however, before a nice rally from the Friday lows resulted in a close just above this level to close the week.

Not much has changed in the chart that was displayed last week, except another blue arrow indicating last Wednesday’s rate hike and slight improvement in the technical backdrop relative to the week prior.

A potential bearish scenario in the weeks ahead is the SPX trading in a bearish channel between the trendline connecting the lower highs since early-February and the extended trendline connecting all major lower highs in 2022. The former will be sitting at 3,988 at month’s end and the latter at 3,811, which is coincidentally the site of this month’s intraday low.

A bullish technical scenario would be the 200-day moving average being used as a launching pad for a sustained breakout above 3,970 that pushes the SPX above its since February trendline resistance, currently residing just above the round 4,000-millennium mark.

Directional movement would be welcome, as 50% of the trading sessions from Feb. 24 to March 24 touched the 3,940 level. There have been seven “non touches” above this level and four “non touches” below 3,940 in this period. Sound familiar?  It should. The 3,940-level acted as a magnet in mid-November through mid-December, touching this level 13 times in 25 trading sessions. 

6 month daily

From a sentiment perspective, the bulls have working in their favor the potential unwinding of negative sentiment among equity option buyers on SPX component names. Per the chart below, the 10-day ratio of buy (to open) put/call volume on constituents of the SPX has surged from the 0.60 area to last week’s peak around 0.80. With an apparent peak at a relatively-high level but lower than the prior peak, this could have bullish implications and thus presents a risk to the bearish case.

With neither bulls nor bears gaining an advantage in the past two weeks, the best course of action would be either to sell premium to take advantage of the range behavior and, if buying equity premium, have exposure to both the bullish and bearish scenarios presented above if the range behavior comes to an end and resolved through some kind of big directional movement in coming days or weeks.

SPX Components

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

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