“…with the SPX at the round 5,500 half-millennium level that coincides with the area of its 30-day moving average, the SPX will have to ‘right itself’ quickly in the week ahead…If the SPX falls below its 30-day moving average, equities are at increasing risk of additional selling over the next month and perhaps into the election”
-Monday Morning Outlook, July 22, 2024
“… the first level of potential resistance in the week ahead is the 5,490 - 5,510 area, with 5,510 representing the level that is 20% above the July 2023 that preceded a correction...”
-Monday Morning Outlook, July 29, 2024
A combination of soft employment data last week and a plethora of nasty earnings reactions from the small-cap and mega-cap tech world was enough to make stocks unravel after a mid-week, post-FOMC close just below the 5,510 area that I discussed last week.
In fact, both ‘Wednesday and Thursday buying was greeted with sellers by the close each day, with the week’s intraday high at 5,566 closing the gap that was created on the July 24 gap lower, which signaled the first volley by the bears, when the S&P 500 Index (SPX-5,346.56) closed below its important 30-day moving average for the first time since mid-April.
Up until Friday morning, the SPX’s 50-day moving average was holding and giving the bulls hope, but the soft July employment number put sellers into overdrive, as growth concerns have reignited, with sellers suspecting the Fed may be too slow to lower rates, despite indicating on Wednesday that a rate cut may be on the table in September.
But as you can see on the chart, unlike other FOMC meeting this year, in which stocks rallied shortly after the meeting, the action post meeting was vastly different, with sellers taking over.
“If selling continues in the week ahead, a break of the 50-day moving average puts the SPX at risk of a move into the 5,250-5,290 area. The SPX’s 100-day moving average, which was nearly touched at the April low, resides at 5,290.”
-Monday Morning Outlook, July 29, 2024
I find it interesting that the Friday low was at its 100-day moving average, which could set up a bounce this week if market participants take their cue from the April low, when the SPX trough was just above this upward-sloping moving average. In fact, Friday’s close was just above another moving average that we typically follow, the 80-day moving average, sitting at 5,334. One risk to a bounce materializing quickly is that the SPX’s 14-day Relative Strength Index (RSI) is around 40, not quite the oversold reading around 30, which it reached at the October 2023 and April 2024 troughs.
That said, if a bounce materializes, the first level of resistance is now below that of last week’s resistance. For example, the 5, 450 area, which is the site of the SPX’s 50-day moving average and its close ahead of the Friday morning employment-data driven gap lower, could be where sellers emerge. And if buyers were to remain in control at and above 5,450, last week’s closing high and intraday high between 5,520 and 5,566 could stand in the way.
Entering the first full trading week of August, the SPX is currently sitting 5.6% below its July 16 all-time closing high, nearly matching the 5.4% decline that occurred from late-March into mid-April. If sellers continue to exert control in the weeks ahead, the next levels of potential support reside at 5,235, or 10% above last year’s close, and 5,000, site of its 200-day moving average.
“I find the CBOE Market Volatility Index (VIX-16.39) peak last week as encouraging for bulls. … it peaked around 18.68, which is 50% above the 2023 close. In April, when the SPX troughed, the VIX also peaked around this area on a closing basis. If there is a close above 18.68, be prepared for more damage in the weeks ahead.”
-Monday Morning Outlook, July 29, 2024
Unfortunately, based on my discussion last week on the VIX, one would not have been prepared for a surge in volatility based on a close above 18.68. Prior to the SPX’s Friday morning gap lower, the VIX closed at 18,59. Early Friday morning, it traded at 29.66, or 60% above the Thursday close, before closing at 23.39.
Typically, after such volatility surges, the VIX will be volatile, trading lower on equity market bounces, but then retesting either the recent closing or intraday highs. As such, we could be in for a period of day-to-day volatility on par with March-April 2023 that are accompanied by big daily moves with little net direction.
Such a scenario may not be surprising amid Fed uncertainty and elections around the corner.
Higher volatility may inspire more premium sellers in the options market. If so, this may fuel more range-based trading, unlike the mostly directional movement we have seen since the October 2023 low.
Todd Salamone is the V.P. of Research at Schaeffer's Investment Research.
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