The SPX's breakout wasn't convincing last week
“While the SPX has not been positive every day…the index has not experienced a close below the pre-inauguration close of 5,997, despite two intraday moves below it… There is work to be done, however, as Friday’s high was the site of another important area that I discussed last week between 6,119 and 6,128, the site of January’s all-time intraday and closing highs. We enter this week’s trading just below this area, but with multiple levels of potential support just below, including December’s closing high at 6,090.
- Monday Morning Outlook, February 18, 2025
On Wednesday of last week, the S&P 500 Index (SPX -- 6,013.13) ducked its head above the 6,128-level discussed above, and closed at a new all-time closing high of 6,144. But this “breakout” was hardly convincing, as about half of that day’s candle was below its prior high, implying it wasn’t a clear-cut breakout. In fact, Wednesday’s close was just six points above 6,138 which, as seen on the chart below, is exactly 20% above the August 2024 low, implying profit-taking was in play for those anchoring to that low.
Profit-takers didn’t waste any time, selling momentum names especially hard the next morning, with the SPX moving back below the January highs, but closing back above the Jan. 24 intraday high at 6,128. But by Friday afternoon, the SPX found itself at or just above support levels that have been mentioned here the past few weeks.
For example, the SPX found stability around the round 6,000-millennium level, the site of short-term peaks in mid-November and early January. This also represented the advancing 50-day moving average, which marked the low in the previous week.
Friday was an ugly candle if you are a bull, but the good news is that buyers came in around the mid-November and early-January highs. It never tested other potential levels of support, such as the pre-Inauguration close of 5,996 and the mid-January breakout level above short-term lower highs at 5,975.
In summary, the SPX notched an all-time high last week. But it remains in a volatile range since the breakout above trendline resistance at 5,975 and highs in the 6,130-6,150 area. And since the late-January bearish “island reversal” pattern, price action can best be described as sloppy in which one day wipes out several days of gains, including Friday.
What about that ugly candle on Friday in which the SPX found itself down 100 points? The best explanation that I have is that call unwind and delta-hedge selling may have played a part given the standard expiration of February options.
For example, when the SPY moved below the call-heavy 610 strike (equivalent to SPX 6,100) in the first half-hour of trading, there may have been unwinding of long positions associated with the 610-strike calls, most of which were bought (to open) by customers.
As the “call unwind” mechanics were occurring, the deltas on the put-heavy 600 to 602 strikes (equivalent to SPX 6,000 - 6,020) increased, forcing sellers of the puts to sell more and more S&P futures. As such, these strikes became magnets, with the 600 strike the last big magnet and coincidentally - or perhaps not -the level at which the SPY found stability, ultimately closing within 10 cents of $600.
Bulls can hang their hats on the potential that option mechanics played a part in Friday’s sharp selloff and these option mechanics will not be in play to start the week. Plus, buyers have emerged at Friday’s SPY close four separate times since Jan. 29, with the SPY rallying about 13 points, or 2%, in the five trading days after SPY $600 was last touched on Feb. 12.
Sentiment remains a mixed bag, with SPX component option buyers still displaying optimism and active investment managers nearly fully invested just ahead of selloff late last week.
But it remains a highly shorted market with the shorts finally showing evidence of beginning to bail but short-term speculators playing the SPY with a preference for put options (downside bets).
The mixed sentiment picture might be creating the market churn we have experienced the past several weeks. As such, continue to key to resistance and support levels discussed earlier in the commentary. Nvidia (NVDA) earnings highlight the coming week in the tech space and in the meantime, investors will digest a plethora of economic data, including consumer confidence, new home sales, jobless claims. And to round out the week, Friday’s January Personal Consumption Expenditures (PCE) Prices, which the Fed watches closely, plus reports on personal income and spending.
Todd Salamone is Schaeffer's Senior V.P. of Research
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