Bulls Made Their Stand: Will They Keep Control?

The SPX held up at 4,225 last week, a key area we've been highlighting

Senior Vice President of Research
Oct 9, 2023 at 8:45 AM
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Last week’s SPX low was at 4,239, or only 14 points above the top end of a potential support range between 4,190 and 4,225. The latter level is 10% above the 2022 close…the SPX’s 12-month, 24-month and 36-month moving averages are currently situated between 4,150 and 4,200. The SPX’s 36-month moving average is at 4,175 and has generally been supportive of the index on a monthly closing basis since its cross-over in 2010.”

-Monday Morning Outlook, October 2, 2023

As of Thursday evening’s close, it appeared the bears were still in control, with the S&P 500 Index (SPX-4,308.50) set to decline for the fifth consecutive week.

However, by Friday’s close and after another reversal from 4,225 – the top of a potential support range I have discussed in prior commentaries – bulls finally seized control, and the SPX ended the week higher. For four consecutive days, buyers overwhelmed sellers at the level that corresponds with 10% above the SPX’s 2022 close, or 4,225.

Since the Federal Open Market Committee (FOMC) meeting last month, the hold in the 4,225 region is the closest I have seen to the bulls taking a stand. It occurred as the rising 200-day moving average currently at 4,205 moved closer to that level, implying the support zone had narrowed between roughly 4,200 and 4,225.

The hold at 4,225 could have significance in context of this year’s late-July high occurring at 4,607, a level that corresponded to 20% above last year’s close. In other words, just as weeks of profit-taking began when the SPX was 20% above last year’s close, might buyers come in and seize control for a few days, weeks or even months, with the SPX pulling back to the level that corresponds with 10% above the 2022 close? 

If Friday was the low, and perhaps even more interesting, is that anyone awaiting a pullback to the 200-day moving average never got the opportunity, and could represent future buying power.

Moreover, the 4,207 level is also significant, as it marks a 50% retracement of the mid-March low and late-July peak, which means Fibonacci “buyers” may have been left out too.

The jury is out as to whether these levels hold in the near term and/or mark a significant pivot point after five weeks of selling. Regardless whether your lean is bull or bear, the potential support area that I brought to your attention is one to have on your radar, especially in context of sentiment readings that are at levels that have preceded rallies in the past, which I’ll dive into later in this discussion.

Even more interesting is just as a bearish “outside day” on the SPX marked the July peak at 20% above the 2022 close, Friday brought a bullish “outside day” at 10% above the 2022 close.

As such, I think if we are on the verge of an unwind of pessimism, immediate overhead technical resistance levels, such as 4,330, or the June and August lows (Friday’s intraday peak too), and 4,355, current site of the sharply declining 20-day moving average, can be taken out with ease, albeit there could be intraday or very short-term hesitations at these levels.

I would view 4,455-4,465 range as a potentially more robust resistance point, which is the site of a trendline connecting lower highs from the late-July peak through last month. This trendline’s range will change and be at lower levels next week since it is sloping lower.

MMO Oct9 1

“…the VIX…failed to sustain a move above 18.23, which is half last year’s closing high. Moreover, on an intraday basis, the 19.23 level, which is 50% above the 2023 closing low carved out in September, acted as a peak... Equity buyers be aware that a move above the aforementioned levels could precede VIX readings of at least 21.67, the 2022 close, or 25.64 -- double the September closing low.”

          -Monday Morning Outlook, October 2, 2023

As the SPX held support levels last week, the CBOE Market Volatility Index (VIX-17.45) experienced multiple closes above the 18.23 level, which is one of two levels that I suggested could foreshadow growing risk of higher expected volatility readings and lower stock prices in the immediate future.

This presented a conundrum for traders, because as of Thursday’s close and prior to Friday morning’s October employment reading, the VIX was still suggesting caution, as it closed above 18.23 for the third consecutive day (see circle in graph below). This was in the context of the SPX holding support at 10% above last year’s close, potentially signaling higher stock prices.

Indeed, Thursday’s VIX close foreshadowed Friday morning’s decline, but the selloff was brief, with the 4,225-level marking the intraday low for a fourth consecutive day. Moreover, the VIX triggered a buy signal when it moved below 18.23 late Friday morning.

VIX Oct8

As for the sentiment landscape, I have been saying for weeks that while the short term has seen technical deterioration, the biggest risk to bears is sentiment being overly pessimistic and at levels that have preceded rallies.

For example, equity option buyers, per the chart below, are around extremes in pessimism. The higher the ratio, the more skepticism among this group. Note that they tend to be wrong at key turning points, and one such turning point could be now.

Combine that with the fact that active investment managers, per the weekly National Association of Active Investment Manager (NAAIM) survey, have their lowest allocation to stocks since August. Their allocation to stocks, in fact, is around that of January and March of this year, both of which preceded rallies.

And don’t forget that the pullback in equities has been attributed to higher interest rates and lower bonds. But where do rates head from here? Per my commentary last week, from a contrarian perspective, one should not be surprised if we are at or near a peak in rates -- albeit only temporary, with all but a few anticipating higher rates. I think it would only take rates not going up or at least stabilizing at current levels for an equity rally to materialize.

MMO Oct8 3

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

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