S&P 500 Levels to Watch Heading Into Expiration Week

Delta hedging at the SPY's 510 strike this week could be pivotal to price action

Senior Vice President of Research
Apr 15, 2024 at 8:50 AM
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“... The break of channel support on Thursday… In fact, Friday’s intraday high at 5,225 was at the bottom rail of this channel. The ‘glass half full’ approach points to the SPX holding -- at least for now -- the 30-day moving average (at 5,160), a trendline that marked a solid buying opportunity in January... take note of the CBOE Market Volatility Index’s (VIX – 16.01) move above 15.40, which is half the 2023 high and an area that has marked multiple peaks this year.… be open to the possibility that the VIX is hinting at higher volatility ahead, which could mean coincidental weakness in equities. ”

          -Monday Morning Outlook, April 8, 2024

A higher-than-expected consumer price index (CPI) reading on Wednesday, in addition to geopolitical tensions, culminated in additional stock market weakness last week. Remaining hopes of a rate cut in June were dashed as some Federal Reserve officials appeared to backtrack on expectations that inflation was headed in the right direction.

Last week’s decline in the equity market followed a warning shot the week prior, on the heels of hints from one Fed official that there may not be a rate cut in 2024. This helped push the S&P 500 Index (SPX – 5,123.41) below channel support. Additionally, there was a hint from the Cboe Market Volatility Index (VIX – 16.74) that higher volatility was an increasing probability after two closes above 15.40 in the first week of April.

At risk of drawing lines in the sand, bulls and bears should be aware of levels that came into play on Friday that could be a pivot or hesitation point for both the SPX and VIX.

The SPX’s 50-day moving average, which acted as resistance on a bounce prior to the October 2023 trough, marked the Friday afternoon low. As such, keep an eye on this trendline, which is sloping higher and rising about five points each day. It enters the week at 5,111.

There are two points of resistance overhead. The first is the 30-day moving average, which is beginning to flatten, and comes into the week around 5,175-5,180. The second resistance level is at 5,220, site of the channel break on April 4. This level marked highs last week.

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Another notable level to watch for the VIX is 18.68, which corresponds with 50% above the 2023 close. If you follow the VIX closely, you know it tends to respect round numbers that anchor to a key high or low, or a key year-to-date percentage level.

In past weeks, for example, we discussed the importance of 15.40, or half the 2023 high. Will 18.68 have the same importance as 15.40 in terms of acting as resistance like 15.40 did in the first three months of the year? If so, a VIX peak would correspond to a low in equity prices.

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The SPX is now 2.5% below its late-March closing high, hardly considered a correction at this point. But with optimism among active investment managers and newsletter writers in the early stages of unwinding, equity option buyers increasing the number of put purchases relative to call purchases, and shorts building positions in recent weeks, the risk of corrective action is heightened, since quantified momentum measures on the SPX are no longer in place.

The chart below displays the recent optimistic extreme among active investment managers, as measured by the weekly National Association of Active Investment Managers (NAAIM) survey.

In this survey, managers indicate their net allocation to equities each week, and we smooth the results with a four-week moving average. Note the four-week moving average is currently rolling over from an optimistic extreme, implying active managers are slowly decreasing their allocation to stocks.

This rollover could be short-lived, resulting in little additional downside, but the risk is a decrease in allocations to stocks persisting over weeks or months, which occurred in late 2021 and last summer.

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Loyal readers of this commentary may remember that during the momentum stage of the bullish run from November into most of March, short-term traders using SPDR S&P 500 ETF Trust (SPY – 510.85) options were great contrarian indicators, as they were emphasizing put options more so than call options on contracts with five days or less until expiration.

It’s interesting that last week, and after the break below the bottom rail of the SPX bullish channel, this group emphasized calls (or upside bets) more so than puts (downside bets) on the weekly 4/12 options that just expired. In fact, there were put liquidations on multiple strikes.

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It is now standard April expiration week. The SPY is currently sitting in the vicinity of the 510-strike, which is also home to more than 80,000 put open interest in the expiring April series.

I point this out because a technical break below this popular moving average could induce selling. Moreover, those short 510-strike puts are likely to hedge their position by selling SPX futures to remain neutral. If an onslaught of both technical-based and option-related selling occurs, big put strikes – such as the peak put open interest at the 500 strike – could become magnets.

But this scenario could occur on a significant break of the 510-strike. The bullish scenario is the 50-day moving average holding, and any short positions related to the out-of-the-money put open interest strikes being unwound, which would support an expiration week rally.

Be open to both possibilities, if trading this time frame.

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

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