New SPX Trendline Builds Bullish Case

The SPX's 30-day trendline could be of significance in coming days and weeks

Senior Vice President of Research
Jan 22, 2024 at 9:00 AM
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The good news: After the S&P 500 Index (SPX — 4,783.83) crossed below its 20-day moving average in the first week of 2024, it took only two trading days for the index to rally back above it…The not so good news: the SPX’s inability to slice through the January 2022 all-time closing high.”

          - Monday Morning Outlook, January 16, 2024

Since the S&P 500 Index (SPX — 4,839.81) neared its all-time closing high in late December, a breakout above this level remained elusive...until Friday. Prior to Friday, range behavior had taken hold, with only modest downside in the index.

In fact, in the middle of last week, the SPX closed below its 20-day moving average for the second time this year, but without a negative consequence.

But per the chart below, note that the 30-day moving average marked last week’s trough before a short-term, “cup-and-handle” breakout to new all-time highs. As such, the 30-day moving average might be of significance in the days and weeks ahead, just as it was in mid-October when it capped a mini-rally prior to the ultimate low in late October.

The early November cross-over of the 30-day moving average, just after the Federal Open Market Committee (FOMC) paused on a rate hike for the third consecutive time, ultimately marked a 'buy' signal.

SPX 30-Day 2024

“… since equity option buyers on SPX component names began placing more downside bets (put purchases) relative to upside bets (call purchases) in comparison to previous weeks, it has not had a coincidental negative impact on the market as of the end of December…there was short covering on SPX component names…short interest on SPX component stocks reached a multi-year high in mid-December, could limit the downside in the market or even push the SPX through resistance at its January 2022 closing high.”

          - Monday Morning Outlook, January 16, 2024

In last week’s commentary, I mentioned a couple of encouraging signs with respect to the SPX’s price action and the sentiment backdrop. The first chart below is a visual that gives us perspective on how equity option buyers were viewing the potential resistance just below 4,800, or the 2022 all-time closing high.

As you can see, the orange line began rising sharply just before the Christmas holiday, indicating that equity option buyers were buying puts at a higher rate than calls relative to previous weeks on SPX components. In other words, this particular group was displaying growing caution. But amid this growing headwind from the increased put buying, the SPX did not selloff, but traded in a range just below its all-time closing high.

The underlying takeaway was that if a breakout were to occur, which it did last week, it would catch more short-term option players off guard relative to mid-December, when the ratio of put buying to call buying troughed.

SPX 10-day PC ratio January 2024

I also speculated that a potential tailwind, the short covering that emerged in the second half of December, could help support a breakout. New short interest data as of mid-January will be released soon, but regardless of what the shorts did on SPX components in the first half of January, my guess is last week’s breakout could cause more short covering like we saw in the second half of December. 

For those that missed last week’s commentary, a positive is that total short interest on SPX component names hit a multi-year high in mid-December (see the last chart). This implies that there is plenty of short covering potential to keep pullbacks in check and/or a continuation of the rally from the late-October low after about a three week pause.

Finally, active investment managers may have been caught flat-footed ahead of Friday’s breakout. In the latest National Association of Active Investment Managers (NAAIM) weekly survey, the average reading was 53% (100% is fully invested). In other words, active investment managers cut their exposure in half relative to their exposure heading into 2024. As such, another source of support is from this group as they chase the breakout.

Look for more upside in the weeks ahead. Support in the event of a pullback is in the 4,800 area, which marked the 2022 peak and recently acted as resistance. The rising 30-day moving average is located at 4,725 and is another source of potential support. Based on its current slope, it will be around 4,755-4,760 by week’s end.

SPX Short Interest Jan

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

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