The optimism we are seeing among short-term traders is aligned with price action
“If you are a bull with a six to 12-month horizon, stay the course as the climax in pessimism a few weeks ago continues to unwind via short covering…For short-term traders, the SPX's overbought condition can certainly weigh on your decision-making. But overbought can remain overbought in trending environments…Throughout most of March, the 10-day moving average acted as resistance during the decline. Given its recent importance as resistance on the way down and support during the sharp trajectory higher, the SPX’s 10-day moving average can be used to gauge if momentum is ‘alive and well’ or beginning to waver if the SPX crosses below it.”
- Monday Morning Outlook, April 27, 2026
Another full week of trading has passed, and momentum remains “alive and well” for the S&P 500 Index (SPX – 7,230.12), based on my simple quantified measure of momentum. That is, the 10-day moving average continues to be supportive, with no closes below it since the crossover on April 1. Plus, there were two new all-time closing highs on Thursday and Friday.
This moving average enters the new trading week at 7,150, rising at about 12 points per day, with an end-of-week projection at 7,210. Even if the upcoming week was unchanged from last week, my quantified measure of SPX momentum would still be intact, thanks to rallies late last week.
There is nothing necessarily in the charts suggesting that the SPX’s momentum is about to slow or come to a sudden halt, other than a 14-day Relative Strength Index (RSI) reading that says it’s “overbought.” The RSI is an oscillator that is more useful in trading ranges and pretty much useless during strong trends.
For what it is worth, the SPX first moved into an “overbought” condition during this current trend on April 16 at 7,040 and has remained “oversold” amid another 200-point advance. Moreover, overbought conditions can be worked off via consolidations or small pullbacks. With that said, the 7,040 level could be considered support, as anyone that shorted the market when it moved into “overbought” territory may look at a pullback to this level as a good opportunity to exit at breakeven.
“The best opportunities in the short-term arise when the extreme sentiment begins to roll over. It is during this stage of transitioning from maximum pessimism to early-stage optimism that you will see the ‘V-type’ action on a chart. The best representation of the sentiment shift from extreme bearishness to increasing optimism among short-term traders is seen in the buy (to open) put/call volume ratio on SPX component stocks.”
- Monday Morning Outlook, April 27, 2026
There was a “V” pattern until the SPX broke out above its late January, all-time high in mid-April in a continuation move from the lows. It comes as no surprise that the rates at which option buyers are buying puts (downside bets) to calls (upside bets) has declined significantly relative to late March, as the SPX was about to trough.
Now, the ratio is getting into an area that we can characterize as approaching extreme optimism. But this is where it gets tricky. At the bottom, the extreme negative sentiment occurred as the SPX was trading around long-term support and not even 10% below its all-time high. We are currently seeing optimism, but amid records, which is to be expected.
Sure, declines usually come when short-term traders are displaying optimism, but such optimism will tend to persist as long as the SPX’s price action validates such sentiment.
In fact, last year, we saw the 10-day SPX component buy-to-open put/call volume ratio bottom where it is now. At the time last year, the SPX was rallying from its Liberation Day tariff lows and approached the old highs before the tariff news surprised market participants.
Put buying picked up in anticipation of a double-top last year, but the SPX busted right through the prior high, setting the stage for a continuation move that persisted longer than most were positioned before.
The point is that while the ratio is hinting at vulnerability, the momentum higher may override this vulnerability. As such, we would suggest remaining bullish, unless the technical backdrop suggests option-buyer optimism is misplaced.
The optimism we are seeing among short-term traders is aligned with price action and thus not actionable (yet) if you are looking to short the market. At the very least, you would want to see evidence of slowing momentum, and that may not necessarily be a short signal as we learned last year.
Finally, if you are an intermediate to longer-term investor, you will like what you see in the second chart below. Total short interest on SPX components remains at a multi-year high, virtually flat in comparison to the two-week period ending in mid-April. Short covering among longer-term market participants could be the fuel that keeps stocks charging higher.
Todd Salamone is Schaeffer's Senior V.P. of Research
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