Must-Watch Levels as the Market's Wild Ride Continues

The following is a reprint of the market commentary from the October 2015 edition of The Option Advisor, published on September 24. For more information or to subscribe to The Option Advisor, click here.

In late August, the choppy sideways action that characterized the spring/summer 2015 market action devolved, in a matter of mere days, into an abrupt crash lower. In the five sessions between the Aug. 18 close and the Aug. 25 close, the benchmark S&P 500 Index (SPX) lost 10.9% of its value, while volatility gauges spiked higher.

Since this unceremonious bump lower, however, the S&P appears to be reestablishing its preferred mode of transportation (albeit at a reduced elevation) -- a primarily horizontal chop, offering bulls and bears alike equal measures of vindication and frustration.

For options traders, one benefit of the current environment is the ability to maintain evenhanded exposure via a mix of call and put positions, as there's been no shortage of the drastic directional moves necessary to yield healthy profits (with the caveat that predicting the S&P's day-to-day swings of late is a feat from which Nostradamus himself would most likely shy away).

So, while the S&P has proven its ability to stay contented for months at a time within a narrow price range, we thought it would be a useful exercise this month to outline the key technical levels we're watching right now. By monitoring the progress of major indexes and exchange-traded products around these notable price points, traders may be able to derive a sense of whether the market's next big move is more likely to be a breakout rally -- or another panic-inducing plunge.

S&P 20-month. The significance of the 20-month moving average for the S&P was discussed in detail in a recent Monday Morning Outlook. After closing below this long-term trendline in August, traders should closely watch where the S&P finishes September in relation to this level. An S&P close above the 20-month might suggest that the market has found bottom (at least temporarily), while a second consecutive close beneath this trendline might indicate more pain ahead. Currently, the 20-month moving average is located at 1,999.10, with the S&P at 1,932.24.

Meanwhile, on the downside, SPX 1,860-1,870 is worth watching. This area contained the index's closing lows during the rapid-fire declines of October 2014 and August 2015, so a break below this region could spark pile-on selling.

RUT 1,200 and 320-day. The 1,200 century level was a key area of resistance for the small-cap Russell 2000 Index (RUT) in 2014. After closing below this round-number area in August, RUT has peaked only as high as 1,193.99 in September. A close by RUT above 1,200 would be encouraging for bulls -- but if the small-caps continue to find resistance here, it may indicate limited additional upside for the broader equities market.

In conjunction with RUT 1,200, traders should note the significance of the corresponding 320-day moving average, currently positioned at 1,193.71 (just south of RUT's 2014 close at 1,204.70). After providing support from late 2014 through early August 2015, RUT's 320-day moving average has more recently emerged as resistance, with a mid-September rally attempt petering out right at this trendline.

VIX 23.90, 20.37, and 19.20. Since its late-August trip to the stratosphere, the CBOE Volatility Index (VIX) has cooled off, but remains high relative to its mid-2015 stomping grounds in the 12-13 area. Traders should exercise caution when the VIX pops above 23.90, which represents double its 2015 closing low. On the other hand, 20.37 is half the index's 2015 closing high, while 19.20 marks the site of its 2014 close. As a result, a VIX move below the 20.37-19.20 zone would indicate a more favorable environment for market bulls.

XIV 30 and 25. We've discussed the usefulness of the VelocityShares Daily Inverse VIX Short-Term ETN (XIV) in this space before. The exchange-traded note is structured to move inversely to the VIX, and -- unlike the volatility instrument on which it's based -- XIV's chart tends to form orderly, "equity-like" patterns that lend themselves quite easily to meaningful technical analysis. In the fall of 2014, XIV's breakdown below the $40 level served as a kind of "canary in the coal mine" for the S&P's painful October sell-off. More recently, XIV has been encountering resistance in the $30 level, with the $25 region emerging as tenuous support. An XIV breakout above this trading range could help to confirm an "all clear" signal for the stocks, while a move below this lower rail would be welcome news for bears.