Keep tabs on SPX 7,000 strike as we move closer to Friday
“The SPX did peak above prior highs before year end, but my general thought process about a continuation of range-bound trading has held true as we enter 2026. It is a highly shorted market and has been for more than a year. As such, short-covering rallies could occur at any time… I think the wild card now and over the next several months is the fact that there are plentiful shorts who are betting against stocks (and not having much success). As such, be open to a short-covering rally if the SPX finally makes a sustained move above its recent range highs...”
- Monday Morning Outlook, Jan. 5, 2025
A range-bound market has been a major theme for me during the past few weeks, as short-term traders unwound excessive optimism that surfaced in December. This range pattern held through Thursday’s trading session, with the S&P 500 Index (SPX – 6,966.28) spinning its wheels at its late October and early December highs. But on Friday, the SPX made a move after the release of December’s nonfarm payrolls and unemployment rate, plus the release of September and October housing data.
Added job market certainty and the absence of a negative surprise pushed the SPX to a new closing high and further above 6,920 -- the late October intraday high. The index touched that level several times since mid-December through last week.
A wild card that I anticipated could be at work to keep a floor on stocks and possibly sustain a move above resistance also hinted to be a factor. For instance, a list of 60 short-covering candidates our quantitative analysts generated late last year has seen 83% of them rally so far in 2026, with an average return of nearly 7%.
The premise of this list was that shorts sitting on hefty profits would delay covering until the turn of the calendar year, so that profits would be realized in 2026 and the tax bill on these trades wouldn’t be due until 2027.
To the extent that such short covering has led to an improvement in the technical backdrop of these names, more covering could be in store in the immediate horizon amid a continued rotation into last year’s “have nots” and “under-the-radar” names, also known as anything outside the mega-cap technology group.
“I think the headwind in the market that we are currently seeing is visible when quantifying the actions of option buyers on SPX component stocks…traders buy more put options than call options relative to prior days during the unwind of optimism phase, creating a coincidental headwind.”
- Monday Morning Outlook, Jan. 5, 2025
Extreme optimism among short-term traders, as measured by option buyers on SPX components, left the index vulnerable to choppy or corrective action in December. The unwinding of optimism that contributes to messy price action or corrective movement didn’t last very long.
Per the chart below, note that the year-end close marked a near-term low, as option buyers took a more positive view of the market. The SPX component buy-to-open put/call volume ratio turned lower, which is evident of optimism returning, and perhaps another supportive factor for stocks. There is room for this ratio to decline to levels that have typically preceded weak price action, but not the kind of room that typically precedes long, sustained rallies like we saw at the April 2025 trough.
This coming week is full of events, including the beginning of earnings season that typically kicks off with many financial giants reporting. Inflation data is expected on Tuesday and Wednesday morning, along with November retail sales data on Wednesday morning. Wednesday also brings word from the Supreme Court, which could decide on the legality of President Donald Trump’s tariffs.
It is also standard January expiration week. Though 0DTE options still dominate the day-to-day action, stay in tune with the potential significance of the SPX 7,000 strike as we move closer to Friday, as there is gigantic put and call open interest (OI). The OI at this strike stands out relative to other strikes and is thus a level to watch for potential “pinning” action, if the SPX is trading in this area at the end of the week.
As such, potential overhead resistance is at 7,000, which is not only important from a psychological perspective, but also has options-related significance. Multiple support levels are below, too, which adds pressure on the shorts. The first potential support level is at 6,920, which has acted mostly as resistance since late October.
It’s worth noting that closes above this level have been short-lived since last month. Implying the SPX moves back below 6,920 again, another area of support is between 6,845 (the 2025 close) and the upward-sloping 30-day moving average, currently situated at 6,865. The SPX’s 30-day trendline acted as support during multiple pullbacks and consolidations after June’s breakout above the February 2025 high.
Todd Salamone is Schaeffer's Senior V.P. of Research
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