The SPX is nearing resistance near 6,000 amid bullish sentiment and overbought signals
“Long-time readers of this commentary might recall the multiple bearish “outside day” candles that formed ahead of weak price action in 2024. But in last Wednesday’s trading, with the low below the prior day’s low and the high and close above the prior day’s high, it was a bullish outside day that proved bullish for the rest of the week…. beginning with the two-week period after the signal and through the following three months, the outlook favors the bulls..."
-Monday Morning Outlook, May 5, 2025
“To the extent that put open interest is partially driven by hedging of long U.S.-based stock positions, the low put open interest could be due to less hedging among money managers. Anecdotally, I have seen money managers mention stock markets across the ocean as presenting more value than the U.S. and it seems currency and gold are attracting interest…Trade talks from over the weekend will likely dictate this week’s action and was a major “known, unknown” at the end of trading last week”
-Monday Morning Outlook, May 12, 2025
I reviewed a couple excerpts from the past two weeks and my post on X (formerly Twitter) last week. I think it captures the sentiment surrounding an important technical development on April 30 that generated the May 5 Monday Morning Outlook commentary headline, “Why the SPX Could Be on the Cusp of Major Upside.” At the time the commentary was posted, the S&P 500 Index (SPX – 5,958.38) was still more than 3% below its 2024 close at 5,907, before closing above this level on May 13.
The April 30 bullish “outside day” candle prompted the headline after our quantified research showed a historical tendency for bullish price action to follow such candles.
In the context of the bullish quantified research, it was evident -- both anecdotally and quantitatively -- that many professional money managers were either on the sidelines and/or chasing other assets, whether that was overseas markets, gold, or currency plays, setting up a bullish contrarian play.
The SPX’s advance last week was driven by a Monday morning gap above several resistance levels that had been on my radar:
- The 5,665 level that marked the July 2025 high and multiple pauses since last summer;
- The 200-day moving average at 5,750; and
- The November Election Day close at 5,783.
A “known, unknown” coming out of last weekend sparked the Monday morning gap, as traders were not discounting positive developments regarding U.S.–China trade talks. There is still uncertainty as to what a deal looks like with China and other major trading partners such as Europe, but traders and investors clearly embraced the positive rhetoric from last weekend’s talks.
So, where does last week’s rally leave us from a technical perspective on an index that has struggled to sustain direction for the past several months and is now “overbought,” according to its 14-day Relative Strength Index (RSI)?
First, the 5,980 level is exactly 20% above the April 8 and 2025 closing low. As you can see on the chart below, the SPX troughed when it was roughly 20% below the February all-time closing high.
Plus, the pre-Inauguration Day close in January at 5,997 is only 39 points above Friday’s close. And just three points above that level is the round 6,000-millennium mark. Note that in the first few weeks following President Donald Trump’s inauguration that the SPX found support at the pre-Inauguration Day close. The first close below that level was soon followed by an onslaught of selling into the early April trough. This coincided with President Trump delaying the “Liberation Day” tariffs, which had sparked sharp selling in the previous days.
If the 6,000 level is taken out, the next obvious resistance comes in just below 6,150 -- the all-time high in February.
As such, a risk to bulls, with the above technical levels in mind, is the Trump administration sounding “less friendly” in the days and weeks ahead as they attempt to iron out trade deals and in the context of the SPX’s recovery as trade war de-escalation took root.
Potential support levels for the SPX include:
- The 2024 close at 5,882
- The Election Day close at 5,783
- The 200-day moving average at 5,760, which is in the vicinity of the late-March high after a brief two-week advance
On the sentiment front, you can see a quantified representation of the unwind of pessimism that has occurred among equity option buyers on SPX component stocks, with the 10-day buy-to-open (BTO) put/call volume ratio sharply moving lower from its 0.70 peak ahead of the current rally.
The current reading of this ratio is 0.51 compared to readings in the 0.45-0.48 area that have preceded periods of market weakness. As such, we are moving closer to a sentiment-based risk from this indicator as the SPX approaches its February highs, which is something to keep in mind in the days and weeks ahead and trade uncertainty still looming, albeit recent de-escalating.
Todd Salamone is Schaeffer's Senior V.P. of Research
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