"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, January 2, 2018
Technology stocks stole the headlines last week, thanks to a 1-2-3 punch of: 1) Facebook's (FB) data privacy breach raising the threat of regulation on social media companies; 2) car accidents involving Uber and Tesla (TSLA), plus a Moody's downgrade of TSLA debt, roiling TSLA and semiconductor company Nvidia (NVDA); and 3) a tweet from President Trump targeting Amazon on taxes and antitrust issues -- not to mention his tariff stance with China weighing negatively on Apple (AAPL).
And while tech stocks took the brunt of last week's hit, ironically it was the tech-heavy PowerShares QQQ Trust (QQQ - 160.13) that held at its 2017 close at $155.76 to rally on Friday, while the S&P 500 Index (SPX - 2,640.87) was turned away violently in Wednesday's trading at its 2017 close at 2,673.61. In other words, we enter this week's trading with the QQQ slightly positive in 2018, while the SPX closed the first quarter in the red, after its year-to-date breakeven tried holding as support at the beginning of March.
"…the SPX comes into the week sitting near the round 2,600 level, which is also an area that is: 1) 10% below the 2018 high; 2) site of its 200-day moving average; and 3) home to a trendline connecting higher lows since this time last year. No doubt, we enter the week at a major pivotal level….If the market falls below the aforementioned support, those who bought around these levels last month are prone to sell, and this could help fuel a further delta-hedge sell-off down to SPX 2,450,,,.be wary of SPX bounces that are not able to take out 2,650."
-- Monday Morning Outlook, March 26, 2018
In the excerpt above, we saw two of the three scenarios develop, with the first scenario coming into play on Monday and Thursday as the SPX rallied strongly from the 2,600 support area. We also saw the last scenario develop, as Tuesday's midday high in the 2,650 area was resolved with sharp downside action into the close -- at which point the SPX built a base in the 2,600 area in a choppy day of trading on Wednesday, ahead of another sharp rally on Friday.
I viewed the 2,650 area as critical for several reasons, including big put open interest at the SPDR S&P 500 ETF Trust (SPY - 263.15) 265 strike in the April series, which is roughly equivalent to SPY 2,650. Oftentimes, after a sharp move below a big put strike, a retest is vulnerable to failing. Moreover, just above this half-century mark is the 2,670 level, which is roughly where the SPX was trading when the Fed raised rates in mid-December, in addition to the 2017 close of 2,673.61. Whereas the 2018 breakeven level proved to be support early in the month, this level now represents potential resistance as we enter the seasonally favorable month of April.
Fortunately for bulls, the SPX did not see a significant break of the 2,600 level that might have led to accelerated delta-hedge selling related to big put open interest strikes at the 260 through 240 strikes, or SPX 2,400. Not only was there risk of selling related to the SPY's open interest configuration, but there are other market participants ready to hit the "sell" button if the SPX breaks its uptrending 200-day moving average, currently situated at 2,589, around the February closing low of 2,581.
And while bulls can take comfort in the 2,600 zone holding last week, keep in mind that the SPX enters this week just below a resistance area as outlined above, and as seen in the chart immediately below.
Heavy put open interest on the SPY remains immediately below the market, which keeps delta-hedge selling risk in play through April expiration. But at the same time, the longer the SPY remains above put-heavy strikes -- such as 260 and 265 -- into and through standard April 20 expiration, the unwinding of short positions related to put open interest about to expire can benefit the bulls.
Given the heavy put open interest around current SPY levels, and the other major technical levels also in play, we could be in store for another few weeks of volatile daily movements that result in little net movement, similar to last week. If the 2,580-to-2,600 support zone breaks, I still see short-term risk down to 2,400-2,450.
If the SPX gets above its 2,650-2,670 resistance zone, there is more potential resistance in the 2,700-2,720 zone, with 2,700 being a round number, big put open interest at the corresponding SPY 270 strike, and 2,720 representing the approximate site of the March 20-21 levels, which is when the Federal Open Market Committee (FOMC) met and decided to raise rates. As long-time readers know, these "Fed day" closing levels have spelled trouble for stocks in the immediate aftermath of a Fed rate hike in the current tightening cycle, with the lone exception being the December 2017 rate increase.
If you are a short-term trader, consider either lengthening your time periods or shortening your time periods to adjust to the increased daily volatility we are witnessing, and are vulnerable to observing into at least April expiration. We are in an environment where both longs and shorts are vulnerable to getting whipped out of positions in short periods.
Finally, on the sentiment front, a couple of data points worth noting:
- The weekly American Association of Individual Investors (AAII) survey saw more bears than bulls this past week for the second time in March. The last time this occurred prior to March was November 2017, which preceded a strong rally into late January 2018. There was less technical resistance overhead relative to now.
- The National Association of Active Investment Managers (NAAIM) weekly survey, an index that measures stock exposure, revealed the largest weekly point drop in exposure since August 2014. Two months later, the market bottomed after a brief drop below its 200-day moving average.
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