SPY

2 Potential Support Levels to Watch for Fed Week

“…judging by Friday’s close, it might be considered more of a victory for bulls than bears. While the SPX moved below many of the key levels mentioned above on an intraday basis, the end-of-week closes were above those levels, including the previous all-time high in March at 4,254…Friday’s bullish ‘hammer’ candle looks like the early May “hammer” that occurred prior to a two-week rally, including a gap higher that marked the first inning of that advance…it is very possible that the bearish effects of the May 23 bearish ‘outside day’ candle have been replaced by the bullish ‘hammer’ on Friday, especially in the context of a major support area holding.”

Monday Morning Outlook, June 3, 2024

In last week’s commentary, I discussed the broad market pullback in the last week of May that followed a bearish “outside” day on May 23. Per the excerpt above, I suggested that the price action could have bullish implications for the market. The reasoning was best summarized by support on the S&P 500 Index (SPX – 5,346.99) holding when evaluating the closes during that week, as well as the SPX’s bullish candle after a successful intraday test of its 30-day moving average.

While the 30-day moving average is not on the radar of many technicians, it's hard to deny its importance since October 2023. It marked a short-term high prior to the eventual trough in late-October 2023 and marked support in January 2024, after a short-term pullback.

A cross below this moving average in early April marked the beginning of a two-week slide in the equity market, with the crossover in early April preceding two weeks of bullish activity.

The 30-day moving average just proved its importance again, marking the low of the last trading day of May, before a bullish “hammer” candle was formed due to late-afternoon buying on the day. Last week’s bullish action is similar to that which followed a bullish “hammer” candle in early May.

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In fact, on Wednesday the SPX notched another closing high and carved out an intraday all-time high on Friday at 5,375, which could be a potential resistance level next week. There may be hesitation among buyers and sellers ahead of Wednesday’s Federal Open Market Committee (FOMC) meeting, as sideways-to-slightly-lower stock prices have generally preceded FOMC meetings this year, with buyers stepping in post-meeting.

The SPX’s 30-day moving average is moving higher at a rate of 10 points per day.  It comes into the week at 5,235 and is projected to be around 5,285 by week’s end. As such, the 5,235-level and the 30-day moving average represent potential support as we move through the week.

Friday’s better-than-expected employment number and wage data, after a string of weaker-than-expected economic readings, caused Fed Funds futures players to reduce the probability of two rate cuts by year-end from 67%, to slightly below 50%.

On the sentiment side, I am encouraged by the market’s price action in the context of continued skepticism among those placing short-term bets on the market. Per the graph below, note that there was again a bias toward put options (red bars), relative to calls (blue bars) on the weekly options that expired this past Friday.

If you are new to this publication, I measure short-term sentiment toward the stock market by observing open interest changes (OI) over a five-day period on SPDR S&P 500 ETF Trust (SPY – 534.01) weekly options that have the nearest expirations. Next week, I will be monitoring SPY 6/14 expiration options.

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It is also encouraging for bulls that put buying on SPX component stocks has increased relative to call buying since mid-May, but the market has continued higher during this period.

In most instances, when the 10-day, equity-only, buy (to open) put/call volume ratio increases, stocks coincidentally struggle. But the rise in this ratio is not as bearish when the SPX is trading above key support levels, as discussed earlier. In fact, with this ratio at higher levels than nearly a month ago (indicative of less optimism), with the SPX at highs the interplay of this sentiment measure and price action has potentially bullish implications.

With the above said, continue to monitor the Cboe Volatility Index (VIX – 12.22) reading. It may rise slightly into Wednesday’s FOMC meeting, but moves to prior lows have generally been resolved with pullbacks of varying degrees in the equity market and a rise in volatility expectations. The May low occurred in the 11.52-11.85 area before the VIX eventually peaked at 14.88. 

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Todd Salamone is the Senior V.P. 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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