“When the ‘tri-star doji’ patterns surfaced in January, February, and April, they preceded mild SPX declines from around the top rail of a channel that the SPX has been trading mostly within since mid-November last year. The declines pushed the SPX to levels slightly below the lower rail of this channel. In fact, trading below the lower rail lasted only a few days at most, as robust rallies from the 50- or 80-day moving averages quickly pushed the SPX back into the bullish channel… If a move below this rail is in the cards, which occurred after the January and February ‘tri-star doji’ patterns, the rising 50- and 80-day moving averages could be supportive, which come into the week at roughly 4,425 and 4,350, respectively.”
-Monday Morning Outlook, September 13, 2021
If you are one that looks for past patterns for clues on future market direction, you can look to the mid February to early March price action in the S&P 500 Index (SPX—4,455.48) and reach a bullish conclusion.
The SPX’s price action from early September through last week has similarities to the February-March period, beginning with the bearish “tri-star” doji patterns that signaled short-term bearish price action and what appears to be troughing action again around the SPX’s 80-day moving average.
There are a few contrasts, with the SPX trading back above the popular 50-day moving average just one day after its breakdown in early March and its move back into the channel on day four after the 50-day moving average break. At present, with Friday being day four after the moving average break, the SPX remains below the bottom rail of the channel in place since mid-November 2020.
In fact, as we look at potential resistance levels this week, the 4,475 level is one to watch, or double the 2020 closing low. Channel resistance from the lower rail ranges between the round 4,500-century mark on Monday to 4,517 through Friday’s close. Support is in the area of last week’s closing lows, or 4,350.
Other major equity benchmarks held support areas too. For example, the Russell 2000 Index (RUT—2,248.07), after rallying sharply in the first quarter, has been in a trading range between 2,170 and 2,350. The 2,170 level is a round 10% above the 2020 close, per the blue horizontal line in the graph below.
If your focus is in large-cap technology stocks, you are encouraged by the fact that the Nasdaq-100 Index (NDX—15,329.68) held support at its 80-day moving average and the round 15,000 level, per the chart below.
In fact, the NDX has performed similarly to the SPX, but trading within a channel since September 2020. Just as the SPX peaked earlier this month near the top of its channel and 20% above the 2020 close, so too did the NDX. And both the SPX and NDX bottomed last week in the vicinity of their respective 80-day moving averages.
In the NDX chart immediately above, I circled the area in mid-July. Note that this circle coincides with the NDX’s first-ever attempt to rally above the 15,000-millennium level. Not only did the 15,000 level prove significant, but the main reason I circled this area is that it represented a multi-year peak in optimism on NDX components among option buyers.
In other words, after a powerful two-month rally, option buyers were ecstatic about the prospects for components of the NDX. This preceded not only a short-term pullback, but a period of range-bound trading into mid-August. And at last week’s low, the 15,000 area was in play yet again, but this time serving as a support area more than eight weeks after that multi-year high in optimism.
Per the chart immediately below -- which is the 10-day average of the buy (to open) put/call volume ratio on NDX components -- note how the sentiment has shifted among option buyers. Whereas in mid-July, on the first attempt to take out 15,000, optimism was not only at a multi-month high, but a multi-year high (the lower the ratio, the higher the optimism). Now, pessimism on NDX components is at a multi-month high as 15,000 acted as support. In fact, pessimism, as measured by this put/call volume ratio on NDX components, is on the same level as early March, when the NDX was testing the bottom of its channel. This combination of technical and sentiment analysis has bullish implications for large-cap technology stocks.
In fact, you could look at this from the perspective that the extreme number of bulls in July were never tested in terms of the NDX pulling back below the 15,000 level. With the NDX finding support at this level, it may have prevented panic selling among weaker hands that were super bullish just ahead of the relative NDX weakness in July and August.
Finally, per the above Twitter observations last Monday and Tuesday and the chart immediately above, last week’s CBOE Market Volatility Index (VIX--19.04) behavior was cautionary in my view. Whereas previous spikes in May, July and August were contained at the VIX’s 320-day moving average, and the July and August peaks contained at the 2020 close, last week’s spike pushed the reading above these levels, setting the stage for more volatility and equity market weakness.
On Monday, however, I posted a Twitter comment about the VIX 27.78 level being potentially the last line in the sand, as it represented a year-over-year (YoY) breakeven on this volatility measure. Note in August that this YoY reading marked a peak, and therefore I saw the VIX’s close from one year ago as important.
This level proved to be the peak, and per my comments on Twitter the following day, the Wednesday close back below the 320-day moving average and last year’s close was the “permission” needed to enter bullish short-term positions. With the VIX grinding higher in a choppy fashion since late June. Keep an eye on the 17 area as a potential level from which the VIX may spike again and signal short-term equity market weakness ahead.
Todd Salamone is Schaeffer's Senior V.P. of Research
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