"The books for 2017 are closed, but as we move into 2018, loyal readers of Monday Morning Outlook are fully aware that the year-end closing levels on major equity, volatility, commodity, and currency benchmarks -- along with their related exchange-traded funds (ETFs) -- could serve as key potential support and resistance levels. This could be the case at least early in 2018, and maybe throughout the year."
-- Monday Morning Outlook, Jan. 2, 2018
After January's huge rally in the equity market, in which the S&P 500 Index (SPX - 2,691.25) was up more than 7% at its Jan. 26 peak, a correction blamed on inflation fears following the Feb. 2 employment report soon followed, and was exacerbated by the unwinding of a huge short volatility trade and delta-hedge selling due to big put open interest on equity exchange-traded funds (ETFs).
A V-type rally after the late-January/early February 10% decline was followed by another closing peak on the 26th day of the month -- this time in February. Hawkish testimony from new Fed Chair Jerome Powell and tariffs on steel and aluminum announced by President Donald Trump, which reignited inflation fears, sent equities into another spiral lower last week.
Last week's decline pushed the SPX and SPDR S&P 500 ETF Trust (SPY - 269.08) down to their respective year-to-date (YTD) breakeven levels at 2,673.61 and $266.86. As I said at the start of 2018, these levels could potentially be areas of support or resistance as we move through the year.
Sure enough, in the heat of last week's sell-off, 2017's closing prices on the SPX and SPY came into play, acting as support on Thursday and Friday. At the same time, Fibonacci followers might find it interesting that the SPY $265.39 level, which is just fractionally below its 2017 close, represents a 61.8% retracement of the Feb. 8 closing low and Feb. 26 closing high.
Moreover, the site of last week's low is where the SPX and SPY were trading when the Federal Reserve last raised rates, in mid-December. I find this interesting because the Fed was in the spotlight last week as investors pushed up the probability of four rates hikes this year, as opposed to the three that Fed officials have indicated.
Also, during the current rate-hike cycle, equities have struggled to rally in the immediate days or weeks following a rate hike, so the breakout to new highs in the immediate aftermath of the mid-December rate hike was unusual. But as we have discovered in recent weeks, there was a price to pay, with the SPX and SPY trading around mid-December levels once again following a solid move above this area into late January.
In the weeks ahead, I see the SPY area between $265 and $267, per the discussion above, as critical from a support perspective. These levels coincide with SPX 2,650, a half-century mark, and 2,670. If these levels break, there is increased risk of a retest of the lows.
True, these levels were broken in early February -- but I think that sell-off was helped along by delta-hedge selling, as the SPY's option open interest configuration made the market more vulnerable than now. Last week, the break of the put-heavy 270 strike was costly, as this likely kicked in some delta-hedge selling, but there was little in terms of additional large put open interest magnets immediately below the 270 strike, which was not the case in early February.
Note in the graph below that last week's trough was in the vicinity of major call and put open interest at the 265 strike. In other words, this strike was not particularly put-skewed like the others above it, and thus the odds were lower of selling related to the open interest configuration at this strike.
If the market is destined to chop in the days ahead, the put-heavy 270 strike is one to watch as potential overhead resistance. Although this wasn't the case when equities rebounded from their lows early last month, often times put-heavy strikes like 270, after being broken, act as resistance on the rally back.
Just below this strike is the SPY's declining 20-day moving average, which acted as support from September through most of January. Given its significance in recent months, this trendline should be on your radar, as potential sellers may be looking for an exit point here after being spooked by two sell-offs in the past month.
"The SPX remains below the 2,750 half-century mark, while the RUT comes into the week below resistance at 1,550, and the MID remains in a battle with the 1,900 century mark.
"...With the long-term trend in the market still not broken, despite the recent correction... there appears to be sufficient reward for bulls in exchange for the risk involved in taking on long positions with resistance lingering just above. That risk grows, however, if the VIX closes back above 18.30-18.66."
-- Monday Morning Outlook, Feb. 26, 2018
As I discussed a week ago in this space, equities began last week's trading with either half-century mark or century-mark resistance lingering just above. Ironically, it was half-century and century marks that marked support last week.
For example, SPX 2,650, Russell 2000 Index (RUT - 1,533.17) 1,500 -- site of October resistance -- and S&P MidCap 400 Index (MID - 1,878.61) 1,850 marked bottoms in last week's trading. However, note that the RUT and MID are underperforming, and come into this week just below their respective YTD breakeven marks at 1,535 and 1,900. From a technical perspective, the SPX looks better positioned.
With equities failing to take out round-number resistance, it was Wednesday's Cboe Volatility Index (VIX - 19.59) close above 18.66 (half this year's closing high) that hinted at more selling to come, as we witnessed on Thursday and Friday morning. That said, it was encouraging for bulls that the VIX failed to take out half its 2018 intraday high at 25.15, the importance of which I noted on Twitter last Thursday.
Moreover, by Friday afternoon, the VIX closed back below 22.08, which is double (a round 100% above) the 2017 close. With the VIX unable to topple 25 and, in fact, closing the week below 22.08, now might be a good time to bet on lower volatility in the days ahead.
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