S&P 500 Index Analysis – 9:15 AM EST
Our Morning Outlook for S&P 500 Index Day Traders considers potential negotiations underway in the Russia – Ukraine conflict. A few hours ago, the prospect of talks reversed the S&P 500 futures’ overnight losses into overnight gains. Rates are climbing this morning, but consensus has morphed again into a 25 basis point Fed rate hike instead of 50. At this writing, the S&P 500 and other index futures are positive and bullishly above yesterday’s high of 4290 (SPY 428.76).
Key Levels and Analysis
I would frame today’s bear/bull reference points as the Weekly Expected Move low (also the overnight low) at 4229 on the S&P 500 March Continuous Futures Contract (SPY 423) and the 5-EMA at 4300 (SPY 430.50). 4300 would be the first resistance, then 4350.
Below the 4229 WEM low, 4200 and 4155 are key support. Market makers and dealers should defend 4229 until today’s weekly expiration at the close.
While I am somewhat neutral this morning after yesterday’s momentous climb, a break of either the top or bottom references above would tip the scales to bullish or bearish as the case may be. If the market were to break down from here, the scant time spent and volume generated inside yesterday’s spike low is an air pocket should the S&P 500 index move lower.
On a related note, yesterday’s short-covering resulted in a “roll-down.” Traders closed puts greater than 4200 (SPY420) while open interest near 4000 (SPY 400) moved higher. Technically, this results in a slight increase in downside risk exposure. We don’t want to see any acceptance below the breakdown low at 4212.50.
I am amazed that our market proxy climbed out of a 127 point hole yesterday. The move back to and above the WEM low saved a few dealers and market makers from Armageddon.
Impact of Option Open Interest, Gamma and Delta
4300 Futures (430 SPY) is the Key Gamma Strike and Hedge Wall from an options perspective. While this level will be resistance, acceptance above would increase confidence that this rally is more than just technical short-covering.
S&P 500 Trendlines
A secondary downtrend line also provides resistance at 4300.
The fact that the market has rejected the range inside January’s spike low and initially found acceptance above it and the 4212.50 (SPY 421.35) breakdown level is bullish. Also, there are multiple positive divergences in strength, momentum, and breadth, qualifying yesterday’s recovery as a successful retest of January’s spike low, perhaps avoiding the need for a further retest of yesterday’s low.
Despite the rally, geopolitical and economic risks are no clearer today than yesterday. Demand for downside protection remains.
This demand leads to unstable markets – no different than what we’ve been experiencing. Volatility remains high, and my forecast of an eventual move to 4000, then 3600, and finally the long-term mean around 2400 to 2500 remains intact.
In the short-term, stability only comes with a concrete resolution of the unknowns, diminishing downside protection demand.
As to the open, overnight inventory is balanced, but a “true” gap this morning follows yesterday’s spike into the close. Both Gap and Spike rules apply.
We want the price to stay within or above the spike to keep the bulls in control. Acceptance below the spike low and back into yesterday’s range isn’t fatal but questions the reversal.
Always remember that how the market handles the gap fill is your first sentiment indicator.
Good Luck Today!
A.F. Thornton