The SPY's 360- and 380-strikes are areas to watch in the final week of the year
“I find it interesting…, that the SPX found support in the area between 3,837 and 3,850, with the former level coinciding with 20% below its all-time closing high and the latter level representing the close when President Joe Biden took office”
-Monday Morning Outlook, December 19, 2022
Last week’s post-standard expiration and the week prior to this week’s quarterly expiration of options can be best described as a chop fest. Bulls were unable to gain the upper hand, as the S&P 500 Index (SPX—3,844.82) failed to rebound strongly from the standard expiration week selling. But the bears were unable to exert a heavy influence, as the levels I discussed last week came into play, in addition to the 3,812 level, which is a round 20% below the all-time closing high at the beginning of the year.
The area between SPX 3,812 and 3,850 has not exactly been an area at which major pivots have occurred in 2022, but it has been a zone at which the SPX has “chopped around” for brief periods this year, as we experienced in June-July and late-October into mid-November.
As such, this week, I removed the multiple trendlines that have connected lower highs and higher lows on the SPX daily chart so that you can better visualize the price action that has occurred in the 3,812-3,850 area this year.
You should still be in tune with the levels that corresponded to the various breakout and breakdown levels from the multiple trendlines that have coincided with rallies and declines this year. Refer to last week’s commentary if you want to see those key trendlines and breakout/breakdown levels.
If you don’t want to refer to last week’s chart, suffice to say that if the SPX resolves last week’s range action to the upside, there is resistance overhead at 3,900 (July’s breakout level above trendline connecting lower highs), 3,940 (breakdown level from another trendline connecting higher lows) and the trendline connecting all major lower highs this year, which comes into this week at 4,022 and ends the week (and year) at 4,013.
If the chop we saw last week resolves to the downside, I see the first area of support being at 3,680 (site of a breakout level from a trendline connecting lower highs in the late summer) and the round 3,700-century mark.
There is little to nothing on the earnings and Fed speech calendars this week. As such, volume will likely be light. The only economic report of significance is Thursday’s initial claims and continuing claims data. With the Fed gauging employment data closely as a guide to what lies ahead on the inflation front, market participants will take their cue from this report once again. Stronger-than-expected claims data last week helped spur Thursday’s selloff.
In fact, per the data from CMEGroup.com and as seen in the table below, fed funds futures traders raised the probability of a higher fed funds rate in March relative to the week prior after a series of economic reports last week.
Another event is the quarterly expiration of options on the last trading day of the year, Dec. 30. The below graph is a snapshot of put (red bars) and call open interest (tiny blue bars) from the 360 to 380 strikes on the SPDR S&P 500 ETF Trust (SPY—382.91), which equates to the SPX’s 3,600 to 3,800 levels.
While put open interest at the 380 strike – the far right bar on the chart below – is not what I would deem huge, its far below the level at the 360-strike on far left of the graph. I still think it is significant at the 380-strike if indeed overall equity trading volume trading volume is light in the shortened week ahead.
A deeper dive into the makeup of open interest strikes indicates the heavier open interest strikes at 365, 370, 375 and 380 are made up of primarily buy-to-open volume, likely trades put on recently to protect portfolios into year end.
The implication is that it will be important the SPY stays above the 380-strike today through week’s end, or else the risk of a delta-hedge selloff increases. At the same time, there could be gradual short covering related to those put-heavy strikes as the week progresses and the SPY remains significantly above those key strikes.
In summary, from both a technical perspective and an option-related perspective, the 3,800-3,812 area becomes an important lower support area in the week ahead for bulls.
Todd Salamone is the Senior V.P. of Research at Schaeffer's Investment Research.
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