“After the SPX’s impressive 20% rally from the early August low to an all-time high in February… there are multiple lines in the sand that could be supportive, even after key short-term and intermediate-term levels break down…The SPX broke below the level when Trump took office in January of this year, but one can key on the pre-election close before the SPX gapped higher on news of President Trump's victory in early November as another area of potential support, since Trump and his administration could be keying on this level, too.”
-Monday Morning Outlook, March 3, 2025
In last week’s commentary, we noted the S&P 500 Index (SPX -- 5,770.20) fell below multiple short- and intermediate-term support levels that included the pre-Inauguration Day close at 5,996, and the mid-November high at 6,001, which occurred immediately after a rate cut and the election outcome. In the process, the index closed below its 20-and 50-day moving averages, the latter sloping lower following a period of choppiness before the selloff began.
The selling continued last week, and unfortunately for bulls, the Election Day close at 5,783 was violated, which is also the site of the mid-January low. While this level broke to the downside, a significant battle appears to be unfolding around it. For example, after a sharp intraday decline below 5,783 last Tuesday, the SPX rebounded to close near this level.
Moreover, throughout the rest of the week, the important 5,783 Election Day close was touched daily -- including an improbable Friday test. The SPX traded as low as 5,666 at the session's halfway point, before rallying back to 5,783 just minutes before closing at 5,770.
Investors might recall that Friday’s 5,666 low carries historical significance, as it was the site of the SPX’s mid-September breakout above the neckline of a bullish inverse "head and shoulders" pattern. The SPX’s post-breakout high reached 6,147 last month, shy of the pattern’s 6,215 target.
Not to be overlooked is the SPX’s 200-day moving average at 5,733, which provided support last week, marking Tuesday’s low after the Election Day close was breached. The index gapped below the 200-day trendline on Thursday and Friday, but managed to close above it each time. Coincidentally, this trendline aligns with the late October SPX lows.
As we reassess the market’s key levels, it is evident that buyers are stepping in at 5,666 (a resistance level from July through September 2024), and the 200-day moving average at 5,733. Meanwhile, the battle between bulls and bears continues at the critical 5,783 Election Day close.
The Nasdaq Composite (IXIC -- 18,196.22) entered correction territory last week, trading below 18,156 on Tuesday and closing below that level on Thursday, making a 10% drop from its December closing high. However, Friday’s close at 18,196 allowed bulls to hold onto the fact that the index remains above the 18,000-millennium mark and its 250-day moving average.
With longer-term support levels in play, bulls can make a case that a bottom or near bottom is in, based on a few sentiment indicators.
For example, the 10-day buy-to-open put/call volume ratio on SPX components has been rising sharply. Historically, this group has poor timing when it comes to SPX pivots. The ratio fell to a multi-year low just before the choppy phase in December and January, and remained low ahead of the latest selloff, pointing to optimism among these market participants.
However, equity option buyers are now purchasing more puts relative to calls than they did from December through February, as seen in the ratio’s sharp ascent in response to recent market action. The ratio is approaching levels that historically signaled extreme pessimism and coincided with market troughs after modest declines.
A risk is the ratio continues to the 2024 highs, and the increased put buying is a coincidental headwind. But if individual equities and the index manage to hold above long-term support as discussed above, I would expect this ratio’s ascent to slow and/or roll over. Regardless, the shift in sentiment from extreme optimism to a level that is more representative of caution among SPX option buyers could be a welcome sign for bulls in the context of SPX components being highly shorted.
Additionally, with the SPX hovering near long-term support, a contrarian mindset suggests a rally may be imminent. This aligns with the latest American Association of Individual Investors (AAII) weekly survey, which shows just 19% of respondents are bullish, while 57% are bearish. The percentage of bearish respondents ranks in the 99.1st percentile of all time, despite the SPX being only 6% below its all-time high reached last month.
Finally, I found the CBOE Volatility Index (VIX -- 23.37) exhibited intriguing behavior last week, amid ongoing tariff uncertainty that continues to unsettle investors. The VIX highs last week coincided with the mid-December peak and, notably, reached a level that was 50% above its 2024 close and double its December closing low. Given that traders often anchor to these round-number percentage changes, further volatility buying at these levels could become less aggressive, potentially reducing a headwind for equities.
These key technical and sentiment indicators suggest the SPX has the ingredients for a rally. However, traders should closely monitor both the VIX and key SPX levels. A sharp move above last week’s VIX high or a decisive break below last week’s SPX low could spark further selling and leave little justification for recent bearish sentiment to unwind.
Todd Salamone is Schaeffer's Senior V.P. of Research
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