Why Extended Choppy Price Action May Lie Ahead

Bulls and bears are fighting for control

Senior Vice President of Research
May 6, 2024 at 8:50 AM
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Last week’s rally that followed the expiration-week decline was encouraging, but there is still work to be done from a technical perspective. On Friday, the SPX closed just below the confluence of its declining 20-day and flattening 50-day moving averages in the 5,115-5,125 zone. Moreover, the 5,111 level is a 50% retracement of the March closing high and this month’s closing low. And finally, there is potential trendline resistance connecting lower highs in the first two weeks of this month. That trendline comes into the week at 5,135 and at week’s end will be around 5,110. ”

          -Monday Morning Outlook, April 29, 2024

The S&P 500 Index (SPX – 5,127.79) rally that followed April standard expiration week was encouraging, but as I suggested, there was work to be done. The index was below technical resistance from multiple perspectives, leaving room for a Monday rally that quickly gave way to selling.

The 50-day moving average and the area coinciding with a 50% retracement of the late March closing high and mid-April closing low acted like a brick wall. Choppy action then followed the SPX’s break below the 50-day trendline, as both bulls and bears tried to seize control.

Support last week, while flimsy, was around the SPX’s unpopular, yet at times significant 80-day trendline, situated around 5,048. This trendline marked support in early May and mid-August 2023. Crosses below it in September and back above it in mid-November marked sell and buy signals, respectively.

A full or near full candle close below the moving average in a week outside of standard expiration may be viewed as a potential sell signal, based on this trendline’s importance in the past year. If a sell signal indeed materializes, the next support level will be around 4,940-4,965. The former is 20% above the October 2023 closing low, while the latter is marking April’s closing low around 4,965.

A move below this region of support would increase the possibility of the SPX revisiting 4,800 – the site of its previous all-time high from January 2023, before it gave way to a January breakout.

So far, the SPX bounced off the supportive 80-day moving average, reaching potential resistance levels again. The first was the trendline connecting highs at the start of the current decline, which the index breached on Friday. It comes into the week at 5,102 and will be at 5,077 at the end of the week, meaning it's sloping five points lower each day.

However, the convergence of the 30- and 50-day moving averages at 5,130 should be on your radar as a point of potential resistance to watch, if the see-saw action continues. The SPX closed under this level on Friday, putting the trendline breakout in an awkward position heading into next week. Early price action may determine if the SPX breaks out or re-enters the choppy environment. 

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On the sentiment front, a few sentiment indicators were neutral. The weekly National Association of Active Investment Manager’s (NAAIM) survey suggests 60% of active managers are invested, with extremes being either 15-20% invested or fully invested.

This group could be in a holding pattern for now, after no major surprises emerged from the Federal Open Market Committee (FOMC) meeting. This week brings another batch of economic indicators, however, including inflation and retail sales data. With these reports due out during standard May expiration week, the options market could exaggerate its reactions. 

One sentiment indicator that moved in options bulls' favor last week was the 10-day, buy-to-open put/call volume ratio on SPX components. It is now showing hints of rolling over from a relatively high level. This type of behavior typically comes up as the market begins a basing period around the eventual lows, withs some rollovers in the ratio coinciding with bottoms.

If the SPX moves above the technical levels discussed above, this indicator will be more valid. Both sentiment and technical indicators suggest extended choppy price action this week, with the potential for the needle being moved during standard expiration week.

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

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