Last year's VIX close at 22.78 is an area to watch
“The SPX enters the week around the levels from which the selloff began, which is where the three-day bearish candle pattern appeared in early November. This area happens to be around the SPX’s 25% year-to-date return, where sellers have been predominant. There is potential resistance here, but with sentiment not as optimistic now relative to when the SPX was trading at this level last month, the outlook is more positive for bulls.”
- Monday Morning Outlook, December 13, 2021
If you are a chart watcher and/or one that is in tune with the options market to determine potential support and resistance levels, there is no doubt you would have had some level of hesitancy in aggressively buying equities early last week.
Not only was uncertainty related to the Federal Open Market Committee’s (FOMC) Wednesday statement lingering as we entered last week’s trading, but the S&P 500 Index (SPX — 4,620.644) was trading in the vicinity of chart resistance from its early-November high, which corresponded to a 25% year-to-date gain.
Moreover, per the open interest configuration chart below, after avoiding growing risk of a delta-hedge selloff in the prior week, the Dec. 7 gap higher sent the SPDR S&P 500 ETF Trust (SPY — 459.87) immediately into a potential “call wall” around the 470- and 472-strikes, equivalent to the round 4,700 century mark and the 4,720 levels on the SPX. These calls have since expired.
If you were not a buyer ahead of the Dec. 7 market open (which is understandable, based on the SPX’s close below a trendline connecting higher lows the evening ahead of the gap), there has not been an attractive entry point from a technical perspective. That is, unless you were using the lows on Friday at the round 4,600-century mark, which was also last Tuesday and Wednesday's troughs. This suggests that some of you could still be sitting on the sidelines, patiently waiting for a better entry point.
Looking for an entry point is encouraged, with the SPX not far from its all-time high, the FOMC meeting behind us, and the National Association of Active Investment Manager (NAAIM) survey showing a 52 reading last week. This reading implies active investment managers have their lowest exposure to equities since May, which was a buying opportunity at that time. Moreover, per the chart below, equity buy-to-open call volume is near this year's lows, suggesting short-term bullish speculators have left the building.
Where is the entry zone, assuming Friday’s low and last week’s low around the round 4,600-century mark may not be it? If 4,600 is broken to the downside, the area between this month’s closing low at 4,513 and 4,591, the close ahead of the Dec. 7 gap, is worth focusing on. Additionally, if a retest of the SPX’s recent low is in the cards, note that this month’s closing low was also the site of the August peak, and is also the current site of the SPX’s 80-day moving average. If this month’s closing low is retested, ensure the Cboe Volatility Index (VIX — 21.57) is below 29 before entering, as this level has marked multiple highs this year.
In the event that 4,600 comes into play again, consider that as a potential entry point too, if the VIX is still below its 2020 close at 22.78. A green light for bulls might also be a move above this month’s closing high at 4,712, which would also be an all-time closing high.
“Based on Friday’s VIX close, the outlook continues to look bullish for equities, as the volatility expectation measure closed back below a trendline connecting higher lows from June into September... The jury is out, however, as to whether Friday’s low simply marks a higher low…”
-Monday Morning Outlook, December 13, 2021
Note that I encouraged using the VIX as an added measure for permission to buy equities in this market that has been full of rotation, with technology stocks leading last week’s decline and retesting the December lows. Per my comments last week and follow-up comments on Twitter, the VIX served as a useful guide last week to avoid buying strength and selling weakness.
For example, I alluded to a trendline in place connecting higher VIX lows since early November acting as potential VIX support. Additionally, I have mentioned the significance of last year’s VIX close at 22.78 acting as resistance. As the equity market chopped around last week, the VIX bounced between these levels of support and resistance, providing us guidance on what to expect in the near term.
Be patient in the days ahead, so that you do not get whipsawed in the current environment. If you are a short-term trader, you may focus more on making decisions later in the trading session, as what you are seeing in the morning or early afternoon may not be transpiring later in the day.
If you are a premium seller and are confident about index or equity exchange-traded funds holding certain levels of support in the weeks ahead, you may want to consider an out-of-the-money put credit spread. Seasonality is in your favor, and certain sentiment measures are hinting at bullish price action and/or limited downside in the event of a choppy market going forward.
Todd Salamone is Schaeffer's Senior V.P. of Research
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