“We enter this week’s trading and a new month just below the lower boundary of a volatile range since January between 4,150 and 4,600, and at the top rail of a bearish channel in play from November into mid-March. Short-term sentiment measures and a pickup in VIX put volume indicate we could see more short-term bursts higher, though moves above resistance levels … may prove fleeting… rallies may be short lived, perhaps even weaker in magnitude than the bullish action from mid-to-late March. As such, they should be used to lighten up on bullish positions or to hedge long positions, if you haven’t done so already…a move north of 4,375 can only happen if the 4,300-century mark is taken out.”
- Monday Morning Outlook, May 2, 2022
In last week’s commentary, I discussed the extremely poor technical backdrop with respect to the S&P 500 Index (SPX -- 4,123.34), the Nasdaq-100 Index (NDX -- 12,693.53) and the Russell 2000 Index (RUT -- 1,839.56). I even went as far as saying that the NDX and RUT were in bear markets based on both the consensus definition of a bear market (20% below their closing highs) and our definition of a bear market, which is a monthly close below a long-term moving average, such as a 24-month, or two-year, moving average.
While the SPX has not met either criteria, I expressed concerns that within the context of the other major indices entering bear market mode, sentiment indicators that we closely track are behaving more like what we have seen in bear markets versus bull markets.
As such, I cautioned that with sentiment growing negative, sharp and quick rallies could occur, but with the major indices trading below major support levels, unless and until those levels were taken back, rallies should be sold.
One potential resistance level that I focused on last week the SPX’s 4,300 century mark. Not only is this level in the vicinity of a round 10% below 2021’s close, but it marked lows in October 2021 and January 2022. This came ahead of a strong intermediate-term move higher in late 2021, as well as a short-term burst higher in late-January into mid-February. But with the SPX well below the 4,300 level heading into last week’s trading, it was highly likely this former support level could act as resistance.
And that it did, following an explosive equity rally on Wednesday following the Federal Open Market Committee (FOMC) meeting. The Fed announced a rate hike of 50 basis points and detailed its plan to reduce its holdings of treasury and mortgage securities beginning in June. Moreover, in a post-meeting press conference, Fed Chair Jerome Powell took the possibility of a future 75-basis point hike off the table.
At Wednesday’s close, with some uncertainty with respect to the Fed removed – at least in the immediate term - the SPX was an impressive 4% above the prior week’s close.
However, it closed right at that 4,300-century mark, and sellers emerged in a big way on Thursday and Friday, sending the SPX to new 2022 closing lows on both days. Might it be investors are concerned about the Fed raising rates relatively aggressively on the heels of a -1.4% advanced first-quarter gross domestic product (GDP) reading released at the end of April? Or maybe they perceive the Fed as being too slow by taking the 75-basis point move off the table, potentially creating a stagflation environment.
If there was any good news, the extended trendline that connected lower highs in 2022 until the mid-March breakout came into play last week and supported the various closing lows. The bad news is that this trendline extends to lower levels with the simple passage of time, implying it is simply limiting downside, but at lower and lower levels.
And unlike the follow-through buying that immediately occurred following the mid-March FOMC meeting when the Fed raised rates by 25 basis points, the SPX found itself back below its pre-FOMC close at 4,175 at week’s end.
As we move through earnings season, if any buyers begin to emerge, it might be corporate buybacks, as those companies with buyback plans in place will typically wait until earnings releases to buy back shares. But with concrete resistance levels overhead, you should use rallies to lighten up if you haven’t done so already unless several areas of potential resistance are taken out.
Resistance as it stands now are at the following levels, with the reasoning stated behind each:
- 4,170-4,175: March closing low and pre-Fed close
- 4,289-4,300: October ’21 closing low and January lows, resistance last week
- 4,375: breakout level from trendline connecting January and February lower highs and site of trendline connecting lower highs beginning with the late-March peak
There is potential support not far below current levels between the 4,000 millennium mark and 4,037, the current site of its 24-month moving average. While this long-term moving average has not contained all pullbacks in the past 10 years, it did mark notable lows in 2012, 2016 and mid-2019. A trendline connecting highs in 2015, early 2018 and early 2020 is sitting at the site of this 24-month moving too.
But as I have alluded to in past commentaries, a monthly close below this long-term moving average – and the trendline discussed immediately above - could precede a move down to its 36-month moving average, like that of early 2016 and late 2018 to early 2019. The 36-month moving average is currently sitting at 3,690. And for what it is worth, the 3,837 level is 20% below the SPX’s all-time closing high in early January.
Be open to all possibilities in the short term, as equity buy (to open) put/call volume ratios are at extremes that have the potential to mark short-term troughs and powerful rallies back to any of the several layers of resistance discussed above.
Also, with standard May expiration less than two weeks away, as long as the SPDR S&P 500 ETF Trust (SPY -- 411.34) remains above the put-heavy 400 strike, equivalent to SPX 4,000, an unwind of short positions related to the SPY 400-strike put open interest could be a tailwind in the days ahead. Finally, the Cboe Market Volatility Index (VIX -- 30.19) closed last week below the 33.00-34.50 area that marks double 2021’s close and double this year’s closing low. This could pave the way to another short-term move to 25.00, or last week’s low and a round 50% above the 2022 closing low.
But as discussed last week, SPX component stocks are not heavily shorted, implying those that threw in the towel during the past few years may use rallies to find shorting appealing once again.
Plus, per the chart below, recent evidence suggests that traditional equity mutual fund and equity exchange-traded fund participants could be in the early stages of panic selling, reversing strong inflows and minor outflows during the past year. With the SPX negative year-over-year, there is a chance that these outflows continue as long as these investors are saddled with losses.
This might suggest that we could be in for months of action in which rallies are short lived, unless and until the SPX overtakes key resistance areas that make it painful for those that are moving to the sidelines or making bets against the market.
Todd Salamone is Schaeffer's Senior V.P. of Research
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