“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…Not to be overlooked is the SPX’s 200-day moving average at 5,733, which provided support last week.. Coincidentally, this trendline aligns with the late-October SPX lows... 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. ”
- Monday Morning Outlook, March 10, 2025
Sellers predominated for the fourth week in a row, as the S&P 500 Index (SPX – 5,638.94) broke below another layer of potential support and the CBOE Volatility Index (VIX – 21.77) pushed above prior resistance to a new multi-month high.
Specifically, the SPX fell below the neckline of its inverse “head and shoulder” breakout at 5,666. This could be a significant development, as anyone who bought that breakout and had been profitable on that move since mid-September is now underwater, prone to re-evaluate the trade, and could become a seller.
This negative development followed the SPX’s gap below its 200-day moving average, and was quickly followed by the decline below 5,666 – the prior week’s low – on the morning we published last week’s commentary.
The close below the 200-day trendline and 5,666, as I underlined in the excerpt above, could induce more selling and leave little or no reason for those taking bearish positions over the past two weeks to unwind those trades.
While the SPX closed below the popular 200-day trendline for the first time since October 2023, the less popular 250-day moving average – which approximates a one-year moving average, since there are about 250 trading days in a year – was broken to the downside, too.
The week’s low, or next “line in the sand,” was at 5,530, or exactly 10% below the all-time closing high of 6,144. You may remember that the SPX high in mid-February was a round 20% above the August 2024 low. In other words, key round-number percentages above a major low and below a major high came into play at the recent top and at last week’s low.
Bulls are hoping that the round-number percentage low marks the ultimate low. For what it’s worth, within five days of the SPX closing below its 250-day moving average in late October 2023, the SPX was back above both its 200- and 250-day trendlines in what turned out to be a “V” rally that lasted into March, before the first notable pullback.
If you are looking for a repeat of the October 2023 through March 2024 “V” rally, which could be driven by an unwinding of built-up pessimism amid President Trump's tariffs, a potential course of action is to wait for a close above the SPX’s 200-day trendline. The SPX closed the week just above its 250-day moving average, which could be the first step in a recovery, at least in the short term.
The close above the 250-day trendline is encouraging, if one is anchoring to the price action from October 2023 to March 2024. Moreover, with the VIX back below its December high and below levels that are double the December closing low and 5% above last year’s close, a volatility peak could be in for the time being, which is bullish.
But with multiple moving averages and other key levels of support broken during the correction, such as the 5,666 level, potential resistance lies overhead. For example, if the SPX manages to retake 5,666, there is resistance between 5,740 (200-day trendline) and 5,783, the latter of which is the Election Day close that was supportive in mid-January. On Friday, a trendline extension connecting the highs from mid-February into early January will be sitting at the 5,783 level.
If you are aggressive and seeking an entry point to play a potential unwind of bearish sentiment – given there are more bears than bulls in the weekly Investor’s Intelligence (II) survey, three consecutive weeks in which the percentage of bulls in the American Association of Individual Investors (AAII) survey was below 20%, and consumer confidence is at its lowest level since November 2022 – a full candle above the 250-day moving average or a close back above 5,666 could be used as permission to emphasize a bullish posture again. But all bets are off on a decline back below the 250-day trendline or the 5,530 level, depending on how much risk you are willing to take.
Per the graph below, note that the ratio of put buying relative to call buying on SPX components is approaching levels that defined bottoms in the past year. That said, a risk in using this indicator at current levels is that the SPX troughs in the past year occurred in the context of the index trading above its 200-day trendline. As such, it may take higher levels of pessimism to mark a bottom relative to those levels that defined bottoms in the stock market last year, since more technical damage has occurred.
Finally, it is March standard expiration week. When analyzing the configuration of the SPDR S&P 500 ETF Trust (SPY – 562.81), the knee-jerk observation might be big delta-hedging risk, as sellers of puts who want to remain hedged are forced to sell more and more SPX futures when a put strike is approached, and then broken to the downside.
However, in doing a deep dive on how the open interest was generated, the 560 put strike is made up of a balanced mix of put buyers and put sellers. As such, it might not come as a huge surprise that the 560 strike was touched in four of the five days since it was first touched on March 10.
The 550 put strike is made up of buy-to-open volume and acted as a magnet in Thursday’s trading. But buyers surfaced at this strike, and it was pretty much a straight shot back to the 560 strike from late Thursday’s session into Friday afternoon, with the SPX closing Friday in the vicinity of last Monday’s morning high.
If put sellers panic and close positions (causing a selloff) or put buyers panic and unwind bearish March expiration trades (causing a rally), this upcoming week’s action could mirror last week’s, with the SPY 560 strike remaining the center of attention from the lens of open interest analysis.
Wednesday’s Federal Reserve decision – no change is expected in rates – could be a non-event unless the board or Fed Chairman Jerome Powell says something that is not anticipated. As it stands now, they appear to be in “wait and see” mode after lowering rates last year, amid tariffs and federal layoffs.
If the 550 put strike comes into play again, there is a risk of delta-hedge selling, but strikes below have a balanced mix of put sellers and buyers, implying these strikes will not act as magnets. Some models are suggesting big delta-hedge selling risk, but they assume that all puts are bought to open, and that isn’t the case for most strikes besides the SPY 550 put strike.
Todd Salamone is Schaeffer's Senior V.P. of Research
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