The SPX at 4,160 could be a historically bullish signal
“This (4,160) level is one to watch closely, as it marked the February high before the benchmark lost more than 7% during a six-week period. Prior to February, the 4,160 level acted as resistance in late May and early June, ahead of a two-week, 12% selloff. In other words, bulls and the 4,160 level have not mixed well in recent history... The 4,160 level is also important because it is 10% above the December closing low. It should continue to be on your radar since sellers have emerged here multiple times since May 2022... ”
-Monday Morning Outlook, April 17, 2023
Since the middle of last month, I have pointed out the importance of the S&P 500 Index’s (SPX—4,169.48) 4,160 level. In May of last year, this marked the peak before a selloff and a long, volatile directionless period for the index.
Since cautioning you about the importance of this resistance level, the SPX pulled back about 2.5% in a six-day trading period between the April 18 high and April 27 low. It is too early to tell whether the price action is a repeat of February, in which the first pullback from 4,160 was shallow before a quick retest of 4,160 preceded a significant selloff into mid-March.
However, if forced to pick a direction, I would bet on a breakout, as the pullback to the April 27 low seemed more orderly. For example, I have mentioned the SPX’ 30-day moving average as having significance in the past, acting as both support and resistance during various time periods, with crossovers or crosses below signaling bullish or bearish action.
Note in the chart below how the moving average acted as resistance in June and early July before a mid-July crossover preceded a powerful short-term rally. A late-August cross below this moving average preceded bearish action, with the 30-day moving average acting as resistance after the early-September bounce.
Bullish price action followed a cross back above the SPX’s 30-day moving average in mid-October 2022, and an early-November pullback to this moving average proved to be an excellent buying opportunity.
Look closely at the graph below, and the SPX has followed a similar script since December 2022 through present, with respect to its 30-day moving average. In other words, crossovers and crosses below have previewed bullish and bearish price action, respectively. After such occurrences, a retest of the 30-day moving average usually occurs, which was the case last week.
Just as early November and mid-January proved to be impressive buying opportunities ahead of a near 10% rally from early November through early December, and a 7% advance from mid-January to mid-February, I see last week’s low as another such buying opportunity. If past is prologue with respect to the past two rallies from the SPX’s 30-day moving average, the SPX could push up to 4,335 or 4,440 in the next few weeks. And as is often the case, a retest of a key moving average usually precedes a breakout.
As a side note, the 320-day moving average is another trendline we monitor. It is not popular among most market technicians, but it has had significance historically. In fact, it was sitting at 4,160 at the time of the February peak. However, in last week’s trading, it acted in concert with the 30-day moving average as support last week. This development could have longer-term bullish implications that would be confirmed if the SPX experiences a monthly close above its 24-month, or two-year, moving average at 4,205.
The Federal Open Market Committee (FOMC) meeting this week is one thing on the immediate calendar that could wreck this bullish argument. But from a contrarian perspective, consider that few are looking for a rally, especially in the area of 7%-10% that is a real possibility in the weeks ahead. Consider that:
- Per the graph below, the 10-day buy (to open) put/call volume ratio on SPX components is approaching levels at most troughs have occurred as a negative sentiment extreme is reached.
- The National Association of Active Investment Manager (NAAIM) weekly survey shows that positioning for a rally is at its lowest since late-March, which was a significant trough in the market.
- Retail survey respondents continue to show more bears than bulls, with the percentage bullish the lowest in a month.
- Short interest continues to build on SPX components, with short interest up four percent in 2023, even as the SPX is higher during this time frame.
Past patterns with respect to the SPX’s 30-day and 320-day moving averages signal bullish price action in the days and weeks ahead, supported by an array of sentiment indicators that suggest many could be caught flat-footed on a breakout. Those caught flat-footed represent future buyers.
Aggressive traders should bet on a breakout above SPX 4,160, while those that prefer to play it safe might consider getting past the FOMC meeting and awaiting a move above 4,160 before increasing equity exposure.
Todd Salamone is the Senior V.P. of Research at Schaeffer's Investment Research.
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