“...unlike previous instances in which buyers emerged at the SPX’s 50 or 80-day moving averages, immediately pushing the index back into its channel, the buying at the 80-day moving average this time around proved to be only a short-lived bounce.”
- Monday Morning Outlook, October 4, 2021
“As the technical backdrop has become less orderly in terms of buy-the-dip, we are seeing evidence of pessimism growing, a condition that is necessary for a bottom. But in our experience using sentiment indicators, it is not only the absolute level of sentiment measure, but also the direction that the sentiment measure is heading. In other words, the most bullish conditions occur after a relative extreme in pessimism is achieved, and there is evidence that such pessimism has climaxed.”
- Monday Morning Outlook, October 4, 2021
The above excerpts and Twitter observation, along with the chart below, should give you some context as to where we were with respect to equities, as measured by the S&P 500 Index (SPX – 4,391.34), and what could lie ahead in the coming weeks. The good news is the SPX is attempting to establish a trough, after the orderly uptrend that was in place for months was upended in September, leaving questions as to if and when buyers would finally emerge.
With standard October expiration on Friday and a huge build-up of put open interest at the 400-430 strikes, the risk of a delta-hedge selloff increases if the SPDR S&P 500 ETF Trust (SPY – 437.86) breaks 430, equivalent to the SPX hitting 4,300 in the upcoming days. If the SPY remains above these put strikes, there will be supportive expiration and short covering related to that put open interest, which is a plus for bulls.
The bad news is with the SPX’s first pullback of 5% or more since September 2020, a multitude of potential technical resistance levels linger above. As such, it remains to be seen how much buying power is still in place after the lows were established in the 4,300 area in late September, as well as last week.
For instance, the now declining 50-day moving average, which is now situated at the 4,440 level, marked the intraday high late last week. And with an orderly pattern of buyers stepping in for months, the 4,475 mark, which is double the 2020 closing low, could present a challenge, as those looking for an exit point anchor to the 2020 closing low. As if that weren’t enough, the SPX is currently contending with a trendline connecting lower highs since early September.
Where is support, then? The obvious first level is 4,300, which is the site of lows in September and last week. With the SPX’s recent move below its 50- and 80-day moving averages, I looked for an unpopular trendline that could be supportive if sellers push the SPX below 4,300.
I found that the 150-day moving average has been noteworthy in recent years, acting as support during a rally from June through October 2019, and again in June 2020, after the equity market rallied from Covid-19 lows in March and experienced its first major pullback that summer. This trendline is currently located at 4,264, while the more popular 200-day moving average resides roughly 100 points below at 4,150.

“It wouldn't take a knockout, great, super-strong employment report (...) It would take a reasonably good employment report for me to feel like that test is met.”
- Federal Reserve Chairman Jerome Powell, September 2021
“The U.S. added 194,000 jobs in September, data showed Friday, substantially less than expected and down from August. Economists had forecast a gain of 500,000 jobs.”
- The Wall Street Journal, October 8, 2021
With the potential technical resistance levels above, investors will be weighing numerous uncertainties as the final quarter of 2021 unfolds. Specifically, the official start of earnings season is set to begin this week. And while there was a sense of relief that helped spur a rally in equites last week, after an agreement was reached to push the debt ceiling issue into December, that issue will continue to weigh on investors. There is the Federal Open Market Committee (FOMC) meeting in November as well, and after an underwhelming September employment report released on Friday. Debate may also begin as to whether the Federal Reserve will announce tapering in November, which it has signaled is a strong possibility.
“Demand for protection falls as investors bet US stock sell-off is over.”
- The Financial Times, October 7, 2021
Whether it is fiscal or monetary uncertainty, or questions on the technical backdrop of equities after months of orderly buying, I found the above headline in the Financial Times intriguing. My immediate reaction was that this is a good time to be purchasing protection. On the graph below, note that the CBOE Market Volatility Index (VIX – 18.77) is back below its 2020 close and its 320-day moving average, which is encouraging for bulls. But the jury is still out as to whether volatility is trending higher. As such, the pullback to the VIX’s 80-day moving average, which has acted as support recently, could indicate a good time to purchase portfolio protection, while others see decreasing need for it.

Finally, I mentioned above the SPX experienced its first pullback of 5% or more in September. As I watched this unfold, I was expecting the front-month VIX futures contract to move above the second-month futures, in what is known as a rare instance of backwardation. This usually occurs when a lot of fear enters the market.
However, backwardation never occurred on the recent 5% decline in the SPX. I asked our quantitative analysis team what the implications are based on historical data, as my fear was that such a lack of fear would prove bearish for stocks.
As you can see on the chart below, pullbacks of 5% usually produce backwardation with respect to the front- and second-month VIX futures contracts. However, in the three previous instances that backwardation did not occur, the SPX was higher both one and three months later, therefore debunking my initial hypothesis.
Regardless, I still suggest hedging long positions at this time, although I find the data below encouraging for bulls, as it might suggest the growing pessimism we have seen in recent weeks is about to or has already climaxed.

Todd Salamone is Schaeffer's Senior V.P. of Research
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