Hesitation points loom ahead of expiry week

“…technical resistance at the highs of late May and early June has played out. But even after technical resistance set in and futures traders placed much higher odds on another 125 basis points of rate hikes over the next seven months, the SPX traded higher. compared to the previous week’s close…The SPX failed to break above short-term resistance, but seemingly negative news last week didn’t prevent a weekly close higher. As such, there was no reason to make any substantial moves if you took an aggressively bullish position after the mid-July break above trendline resistance. I still think there is minimal advantage in the 4,375 area for the reasons discussed in previous comments..”

– Outlook for Monday morning, August 7, 2022

According to the excerpt above, the S&P 500 (SPX – 4,280.15) failed to break above its May and June highs two weeks ago, but still rebounded as expectations of an even more hawkish Fed in the coming months surged. In hindsight, such action amid expectations of a more hawkish Fed turned out to be a major eye-opener.

The events of two weeks ago preceded pleasant surprises last week in the July inflation data released on Wednesday and Thursday. While the SPX was still advancing amid “bad news” the previous week, the index hit its May and June highs after a few days of “good news” on the inflation front. Moreover, this was the SPX’s first close above 4,262 since early May. The 4,262 level was the SPX’s close the day before the Fed’s initial rate hike in the current rate hike cycle.

As always, when an index or stock rallies after a prolonged selloff, there are several potential resistance levels above it. That said, and according to the chart below, the level that corresponds to the SPX 10% round below the 2021 close is at 4,289. acted as short-term resistance in early May before a sell-off. Immediately above the 4,300 century mark is 4,313, about 10% below the SPX’s January closing record.

As the extremes of negative sentiment continue to ease amid technical breakouts, I continue to see resistance levels as points of hesitation along the way to my first objective of 4,375.

If you got aggressive on the long side after the mid-July break above trendline resistance, you could take some money off the table if the SPX pulls back below the May highs and June to steadily reduce exposure amid weakness that could develop into further weakness. I don’t necessarily expect that to happen, but it’s a plan to play into such a possibility.

The Nasdaq-100 Index (NDX – 13,565.87) saw another break above potential trendline resistance last week, much like the SPX did last month. As I said last week, I find this price action encouraging from a contrarian perspective on the heels of a late May Bloomberg BusinessWeek cover story titled “The Great Tech Rout.”

If you are aggressively long in this sector, you can define your “first level of risk” as last week’s breakout level above the trendline connecting the lower highs since December at 13,280. Or, for this week a close below the trendline, which starts the week at 13,250 and ends at 13,160. A higher level is 12,300, where there is a trendline connecting higher lows on the NDX, a break of which would lead to a probable retest of the lows. But this level is 10% lower than last week’s close, so I would consider taking money off the table for a move below the 13,160 level. This is a level to focus on in the coming days and which can be adjusted later if necessary.

This is the standard August expiry week. Looking at the SPDR S&P 500 ETF Trust open interest setup (SPY – 427.10), the 430 strike, which is equivalent to SPX 4,300, stands out. This is the first strike where the call open interest is well above the sell open interest and could present itself as a “wall of call” this week. The good news is that: 1) this call wall is small and 2) it would take a SPY move below its 400 strike, or SPX 4,000, to put the bulls in immediate danger of huge open interest in below the 400 strike acting like magnets, which took place in the June expiry week.

SPX OI August

Also a reminder that options on futures on the Cboe August Market Volatility Index (.VXc1 – 9:15 p.m.) expire Wednesday morning. With the contract close just above the Wednesday 21st strike, amid a history of a plethora of open call and sell interests expiring historically worthless, an immediate risk for the bulls is an upside VIX and VIX futures contracts at a level that attempts to maximize the number of August option contracts that expire worthless. Should such a scenario materialize, we would see the VIX in the 24-26 zone on Wednesday morning.

VIX OI August

Todd Salamone is senior vice president of research at Schaeffer’s Investment Research

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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