The SPX lost less than 1% since April 28 , despite coming into the week at a resistance area
“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….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….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”
“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.”
-- Monday Morning Outlook, May 1, 2023
Some of you might be familiar with the quote from Mark Twain, “History never repeats itself, but it does rhyme.”
Last week, I spent considerable time discussing a pattern I noticed on the S&P 500 Index (SPX – 4,136.25) since October 2022. Specifically, the 30-day moving average crossovers have been followed by a retest and then a strong short-term rally leaned toward a bullish breakout above 4,160-resistance.
Per the chart below, SPX action hasn’t followed suit since the November script, as the SPX closed below the key 30-day moving average in Thursday’s post-Federal Open Market Committee (FOMC) trading. But as Twain might advise, a breakout above 4,160 may still occur, though history will have to rhyme, not repeat.
In other words, unlike other crossovers of the 30-day moving average since October 2022, successful retests of the trendline have served as launching pads for powerful rallies.
Per the second excerpt above, I mentioned the 320-day moving average as a potential support level. In last week’s trading, that trendline and the late-April low at 4,050 marked the low and could be launching pads for the breakout above 4,160, with the SPX closing back above the 30-day trendline on Friday. That said, the jury is still out as to whether market participants say yes or no to a sustained move through 4,160.
One thing that has repeated itself is that sellers have emerged multiple times at SPX 4,160 since May 2022, with more of the same in mid-April and early May of this year. But if Thursday’s close proves to be a low, the magnitude of the selling hasn’t been what it was and, as such, bulls hope history rhymes but doesn’t repeat with respect to the magnitude of declines from the 4,160 level (such as that which occurred in February and March).
As for the week that just passed, one might call the SPX’s price action “non-directional, but volatile.” In other words, the SPX moved 183 points from the previous Friday’s close to Thursday’s low, and back to Friday’s closing high. However, the net directional movement since the Friday, April 28 close was only 33 points of downside, or less than 1%.
In fact, since the second quarter began in April, the SPX has been locked for the most part in a 110-point range between 4,050 and 4,160. This would suggest in the absence of a breakout above 4,160, there is more risk to the downside than upside reward, if the current range persists in the days and weeks ahead.
The SPX lost less than 1% last week, despite coming into the week at an obvious resistance area, plus macro headlines that one might argue leaned in favor of the bears. For example, despite some signs of slowing in the economy, the Federal Reserve delivered another rate hike, and Chairman Jerome Powell gave every indication they will continue to fight inflation and avoid lower rates. Plus, there was news of another bank failure.
What I found interesting, however, was the relative muted Cboe Volatility Index (VIX – 17.19) response to these headlines. In mid-March, the VIX shot up to the 27-30 area, and peaked in the vicinity of 50% above its 2022 close. While the VIX spiked a little bit on news of First Republic Bank’s failure, note the VIX peaked just south of its 2022 close at 21.67. As such, if the VIX moves above last year’s close, this may hint at trouble ahead.
To the extent that the VIX remains below the 21.67 area, prepare for either more range action or the breakout above 4,160 that I was calling for last week.
As previously mentioned, I think an upside breakout would surprise most market participants, if the action of equity option buyers on SPX components is any indication. In other words, the current ratio of SPX component put buying relative to call buying is around the same pessimistic levels that existed at the March trough. This ratio has moved significantly higher since early April, despite what has so far amounted to a minimal pullback during the past five weeks relative to the February-March decline.
Todd Salamone is the Senior V.P. of Research at Schaeffer's Investment Research.
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