Options Bull Signal Sounding for the SPX

Standard expiration short covering should be on your radar this week

Senior Vice President of Research
May 15, 2023 at 9:18 AM
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As for the week that just passed, one might call the SPX’s price action “non-directional, but volatile.” In other words, the SPX moved 183 points from the previous Friday’s close to Thursday’s low, and back to Friday’s closing high. However, the net directional movement since the Friday, April 28 close was only 33 points of downside, or less than 1%."

Monday Morning Outlook, May 8, 2022

A theme I built my commentary around last week stemmed from a Mark Twain quote, “History never repeats itself, but it does rhyme.”

When comparing last week’s S&P 500 Index’s (SPX – 4,124.08) price action to the prior week, one might conclude that history rhymed, as last week’s action can be characterized as “non-directional, non-volatile,” with the SPX closing 12 points lower on the week.

The distance traveled was considerably less than the week prior, with a mere 54 points defining the intraday low and intraday high, relative to the previous week’s close. As such, history rhymed in terms of little directional movement, but the volatility from high to low wasn’t even close to the week prior.

Where does that leave us? If you are a technician, you can easily see the SPX range between 4,060 at its low and 4,160 at its high since the end of the first quarter, which is circled in the chart below.

As I have said in prior commentaries, 4,160 has been a menace for bulls going back to May 2022, so the struggle here is not a huge surprise. Additionally, this level is 10% above the December closing low, so in an environment in which rallies are being sold, it makes sense that selling occurs here, with the next potential profit-taking level at 4,225, which is 10% above the 2022 close.

While bears are controlling the 4,160 area, the follow-through selling from 4,160 hasn’t been nearly as violent as in the past, so the last several weeks have been equally frustrating for those negative on the market. In fact, the SPX’s net loss this month is entirely attributed to the first trading day of the month, when the SPX closed at 4,119. Since then, the index has gained a lousy 5 points.

With selling proving mild after retests of 4,160, bears repeating that two moving averages have supported this month’s lows in the 4,060 area. Both are converging right now – the popular 50-day moving average and the less popular, but historically significant 320-day moving average. Note that the 320-day trendline acted as resistance earlier this year, but has been supportive this month. The issue is that it is down-sloping, implying support from this particular moving average shifts lower by about 6 points each week.


The options market is flashing a potentially bullish signal for the SPX. Per the graph below, the 10-day, buy-to-open put/call volume ratio on SPX components rolled over, after a steady climb since April. To the extent option buyers represent the actions of short-term traders, improving sentiment toward SPX component names after weeks of growing negative sentiment could pave the way higher in the near term. If you make such a bet for a move higher in the weeks ahead, a move below the 4,050-4,060 region could be your stop.

Standard expiration should also be on your radar and, as usual, I will take a peek at the SPDR S&P 500 ETF Trust (SPY – 411.59) open interest (OI) configuration. Many puts are out-of-the-money (at strikes below Friday’s close) and thus short covering related to these puts could be a prevailing tailwind. But if the SPY pushes below the 408-strike, other big put OI strikes below $408 could act as magnets. Bulls, at the very least, need early week stability for the potential of short covering to play out late in the week.

But if the current range is resolved to the downside, the SPY 400-strike is the site of the biggest put OI and could serve as a magnet in a matter of hours.


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

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