S&P 500 Approaches Trendline With Historic Buy Opportunity

“… Option buyers on CBOE Volatility Index futures (VIX – 33.40), which have a proven track record in predicting volatility expectations for equities over the past few years, hinted that volatility was heading up, potentially putting the SPX mid-March breakout at risk of being a false up move. These option buyers were once again prescient about their timing, with the VIX surging into the 30s area as the SPX fell back below the 4,375 level on April 22nd..”

Monday Morning Outlook, May 1, 2022

“…the Cboe Market Volatility Index (VIX – 30.19) closed last week below the 33.00-34.50 area which marks double the close of 2021 and double the closing low of this year. This could pave the way for another short-term move towards 25.00, or last week’s low and a 50% round above the 2022 closing low..”

Monday Morning Outlook, May 8, 2022

Per the excerpts above, I commented on the Cboe Market Volatility Index (VIX – 28.87), specifically referring to smart money call activity on VIX futures that preceded the decline in stocks and the latest peak in VIX. Additionally, I informed readers of a potential resistance area on the VIX in the 33.00-34.50 area which is double last year’s close and double this year’s closing low.

Admittedly, I’m a little puzzled how this resistance zone has managed to hold since late April, as the VIX has remained stubbornly in this zone as stocks plunge. In other words, on April 26, the VIX closed at 33.52, with the highest close since then occurring early last week at 34.75. Since the April 26 close, the S&P 500 Index (SPX – 4,023.89), after briefly retesting the October 2021 and January 2022 lows, has plunged about 6% to the closing low of last week. As mentioned above, the VIX made very little upward movement during this period and, in fact, closed at 28.87 last week below the 33.52 level on April 26, while the SPX was trading 3.6% above Friday’s close.

I also find it intriguing that the same option buyers who were buying calls at a relentless pace before the recent equity downturn and spike in volatility are now buying VIX futures put options at the highest rate to calls since the end of 2020 – which preceded a major drop in the VIX.

The most recent options activity on VIX futures should be welcomed by bulls, at least in the short term, as stocks would be expected to rally. In other words, if this group is once again right on the direction of short-term volatility.


That said, a risk for these short VIX futures and long stocks comes on Monday and Tuesday, as a plethora of currently out of reach put options on VIX futures are due to expire Wednesday morning. Those who sold these puts likely hedged by shorting VIX futures. But as the VIX expires on Wednesday morning, an unwinding of these hedges could put a floor on very short-term volatility.


While VIX options activity hints at lower volatility and higher stock prices in the near term – bearing in mind the risks of the VIX expiring on Monday and Tuesday – the longer-term scenario is much more complicated for stock market bulls. As I alluded to Last week. Short-term interest in SPX components has been falling for several years, and continued breakdowns in the technical backdrop could embolden shorts. Recent data for April inflows and outflows of mutual funds and exchange-traded funds (ETFs) suggests that market participants are losing patience with stocks for the first time in a long time as their investments start to falter. money with the SPX during the year. negative territory over the year. This group can reduce risk during rallies, reversing the buy-the-dip mindset that has prevailed since the Covid-19-induced sell-off in early 2020.

The SPX 24 and 36 month moving averages have been very good indicators of what is to come, based on the behavior of the SPX around these trendlines.The SPX is still 25% above its 36-month moving average and 12% above its 24-month moving average, admittedly too much to “bear” in a wait-and-see approach. So if you’re emphasizing the long side after the recent SPX breakout, what’s your “uncle” point to guide you in asset allocation decisions? …the SPX level 4,375 should be your “uncle” point to take action to ease on any bullish trades you may have started in conjunction with the SPX breakout two weeks agoIf you are a longer-term investor, a drop in the VIX in the 4:00-6:25 PM area could be seen as a place to cover a long position, if that makes you more comfortable in that environment..”

Monday Morning Outlook, March 28, 2022

While the above risks of increased short selling and/or continued exits from equity funds are real, the SPX is now trading around its 24-month moving average. Significant buying opportunities have occurred here over the years, but you should focus on monthly closes when using these monthly moving averages (and others) as a guide to identify potential risks and rewards. .

As I warned in late March, if the SPX experiences a monthly close below its 24-month moving average, it tends to see additional selling, with the 36-month or 3-year moving average marking some, but not all. . troughs (2011 and 2018 are the most recent examples).


I find it interesting that as the SPX flirts with its 24-month moving average, a trendline connecting multiple highs from 2015 to 2020 and the ~4000 millennial level, I saw a flurry of bearish headlines on the Bloomberg’s app Tuesday night. The titles that caught my eye were:

Wall Street is desperately trying to make up for the rout in stocks »

“Turn off the memes, this party’s over like it’s 2000”

“Stocks will be in a bear market until a one-day drop of 5% to 6%, according to Gartman”

BlackRock’s $100m London Trader Turns Bearish Amid Record Losses

“Small traders are finally downgrading in a market they once ruled”

My immediate thought after seeing these headlines and reading the articles was “be on the lookout for a significant short-term rally, and although a lower probability, perhaps a long-term lead”.

But even after Friday’s rally, there is still work to be done in terms of the resistance level immediately above the head that short-term market participants should be aware of in the days ahead. And as I pointed out last week, there is a large resistance area between SPX 4,170 and 4,375 that the SPX should rally above before I even consider that a longer term bottom is potentially in the works. square.

If there was any good news, the extended trendline that connected lower highs in 2022 through the mid-March breakout came into play last week and supported the various closing lows. The bad news is that this trendline extends to lower levels with the simple passage of time, implying that it is simply limiting the downside, but to lower and lower levels.

– Monday Morning Outlook, May 8, 2022

For short-term traders, you should be aware of the trendline I discussed last week as potential resistance in the days ahead. Unfortunately for the bulls, after the extended trend line connecting the lower highs from January to February served as support the previous week, it failed to do so in last week’s trading.

In fact, after the SPX moved violently below this trendline in last Monday’s trading, it marked the SPX’s intraday highs for the remainder of the week, including Friday. This trendline starts the week at 4,025 and ends the week at 3,991.

A quick early week jump above this trendline would give the scenario I laid out last week a better chance of playing out. Simply put, if the SPDR S&P 500 ETF Trust (SPY – 401.72) stays above the 400 strike heading into Friday’s expiry, there is the possibility of a short-bound hedge. expiry of 400 strike put options which according to exchange data had a buy bias (to open). This implies that the floor is covering the trade by shorting the SPX futures. The downside is that there could be volatility around this strike if the SPY goes back below, as this would force the floor to sell more and more futures. Big open interest on strike prices of 380 and 390 resides below, but both prices had a sell bias (towards the open), implying less potential volatility related to expiration around these levels .

If the trendline discussed above continues to act as short-term resistance, the risk is a move towards a support zone between 3,812 (20% below last year’s close) and 3,840 (20% below this year’s closing high), as indicated by the green horizontal lines in the chart below.


Todd Salamone is Schaeffer’s senior vice president of research.

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