“… the SPX didn’t come close to retaking its 200-day moving average, as it did in early November 2023 following a 10% decline to its 250-day trendline. Nor did it register any convincing or sustained closes above 5,666 before gapping back below the 250-day trendline on Friday morning -- only to rally back and close near the familiar 5,666 level….bearish sentiment remains elevated. But for a sustained rally to unfold, the market will need to inflict pain on bears by rallying through the resistance levels outlined above.”
- Monday Morning Outlook, March 24, 2025
Strategists are describing the current environment as volatile, highlighting fears related to tariffs, Federal Reserve uncertainty, and whipsaw price action. The uncertainty factor is nothing new and, as a trader, the best advice I can offer to anyone with exposure to trading or investing is that if you assume “anything can happen,” you will position yourself as such.
Whipsaw price action is also not new, and if it looks obvious to everyone, it's best to be careful. The classic example of this is last week’s price action in the S&P 500 Index (SPX— 5,580.94). After a 10% correction, it is natural to be looking for clues as to whether the bottom is in for the market. I suggested last week that the sentiment backdrop suggests the potential for a “V” rally.
But the negative sentiment must begin to be unwound via pessimists feeling more and more pain. In our view, the SPX would have to move above key levels for a sustained period, such as the 5,666 level that marked resistance last summer.
Just above 5,666 is the SPX’s popular 200-day moving average, which the index conquered on Tuesday -- a doji candle day, in which the open and close are the same, signaling a potential turning point -- as well as Wednesday. Those closes early last week checked two more boxes that could pressure bears into unwinding if the SPX continued to trade above them.
There was still work to be done, per this observation I made on X on Wednesday. As readers of this commentary are very much aware, another big level loomed above last week, catching many unsuspecting bulls off guard and whipsawing them out of a bullish trade. This big level is on my SPX graph week after week -- the November 2024 election day close at 5,783.
There were market participants aware of the SPX’s move through its 200-day trendline last week. But only a handful were aware of the Election Day close overhead that left them vulnerable to the sharp selling that took place the final two days of last week.
What may have been perceived to be an obvious “all clear,” was not. This is one danger of putting too much emphasis on the most popular of technical indicators. I am not by any means suggesting you completely ignore them, either. The danger in using the popular indicator is that the “the less obvious” could carry more significance.
In this case, a support level that proved of utmost importance in January after the “obvious” break below the December lows became resistance on the rally back: The Election Day close at 5,783.
We can expect a big quarterly expiration of index options this week. Notably, there are more than 40,000 open put contracts at the SPX 5,565 strike that expire today. With the SPX sitting close to that strike and a major brokerage house buying most of the contract as part of a collar strategy, a break of this strike could lead to a flurry of SPX futures selling by those that are short the puts and looking to be delta neutral. In fact, the 5,565 strike may have been acting as a magnet on Friday, and this could continue today.
Note that the open interest (OI) at this strike is as big as any SPDR S&P 500 ETF Trust (SPY — 555.66) put strike that expires today. Given the higher notional value, the put OI at the SPX 5,565 is significant, given that the benchmark is ten times as big as the SPY.
As a side note, I would expect to see heavy buy-to-open June 30 SPX put volume that is at a strike 5% to 6% below Friday’s close, as part of the collar strategy that brokerage is employing.
“The SPY OI configuration below shows typical put-heavy volume at out-of-the-money strikes. But notably, the 555-strike put OI -- equivalent to SPX 5,550 -- is largely sell-to-open generated. That suggests market makers will be buyers as SPY approaches this level to remain hedged. However, the 550- and 545-strikes are made up of buy-to-open volume. “
- Monday Morning Outlook, March 24, 2025
This plays into my observations from last week on the SPY. As noted last week, there is big open interest at the 555-strike, equivalent to SPX 5,550, that was sold-to-open, which means buying of SPX futures will tend to occur from those that bought those puts and want to be delta neutral.
The risk to bulls is that any buying as the SPY approaches the 555-strike may not be enough to overcome the selling, if the larger notional value SPX 5,565-strike is breached to the downside.
Moreover, the SPY 545- and 550-strikes is made up of put open interest that was bought to open, implying a magnet effect could be in play at these strikes by day end Monday if the SPX 5,565-strike put is violated.
If the sharp selling from Friday bleeds over into today, the obvious question is whether the SPX 5,500 level holds, as it did earlier this month. The not-so-obvious is a scenario whereby option mechanics related to Monday’s quarterly expiration send the SPX spiraling below the 5,500 level in a massive chart breakdown that turns out to be a bear trap, since option-related selling that caused the breakdown ends today.
As such, be cautious about getting caught up in a Monday selloff for the sake of avoiding whipsaw action. That said, any break below 5,500 will not exactly inflict pain on the current bears and thus would put a sustained V-shaped rally on hold, potentially.
Be prepared for anything to happen and be open to all possibilities beyond Monday. This is more pertinent than ever because a potential break of recent support today could be a bear trap for the reasons I stated. On the other hand, today is the last day of March, and we risk an end-of-month close below the SPX’s 12-month moving average.
Since 2010, there were six times the SPX closed below its 12-month trendline at the end of the month. In five of those instances, the index went on to decline to at least its 36-month (or three-year) moving average before a new high.
From this perspective, the only good news for bulls is that the SPX’s 36-month moving average is sloping higher, if this were to be its eventual target. The bad news is that this trendline is currently sitting at 4,735, or 15% below Friday’s 5,580 close. If downside of this magnitude is in the cards, option buyers can snag portfolio protection to hedge such a scenario, and one can make money with few dollars at risk to leverage downside as a speculative tool.
If you are trying to prepare for anything to happen while being open to all possibilities, having an option-buying strategy in your toolbox is an excellent first step.
Todd Salamone is Schaeffer's Senior V.P. of Research
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