In a normal market environment quadruple witching expiration tend to be much more volatile that single or double expirations. We suspect tomorrow’s simultaneous quarterly expiration of individual stock options, stock index futures, single stock futures, and index option contracts may be an important turning point in U.S. equities. Why? After one of the most violent sell-offs and hectic trading in stock market history, investors will have one more day to unwind existing positions and to take on new ones. Because many have defensively hedged their portfolios with single stock options, index futures and index options contracts the unwinding of these positions may bring some relief and ease the strong and persistent pressure in recent weeks. This can lead to less drastic market swings and a calmer and more orderly marketplace, at least from a near-to-medium term basis. On the other hand, it is also important to recognize the market continues to be unstable, extremely narrowed, and fearful. Despite the benefits of the unwinding of these defensive hedges the market can quickly return to its erratic and drastic price swings.
So, from a technical perspective what can we expect tomorrow, and most important in the days, weeks, and months ahead?
The sharp -32.8% bear decline over the past 3-weeks have been stunning from so many different perspectives. Extreme volatility was the norm - not only from a daily basis but also from an intra-day basis. For instance, VIX Index (85.47) is approaching the reaction highs coinciding with the prior global financial crisis (89.53 - 10/24/08). Volume has expanded to one of the highest readings in recent memories. Dramatic volume was not only confined to equity-based ETFs but across all financial assets including commodities, currencies and fixed income ETFs. In three weeks market sentiments suddenly reversed direction and have turned decisively bearish and within reach of prior extreme levels (i.e., Put/Call ratio, % of stocks trading above its 200-day moving average, AAII, II, Market Vane, and Wall Street Sentiment surveys). Financial markets have also experienced market dislocations. For example, yesterday’s market dislocations (3/18/20) led to sharp declines across almost all financial assets except for the U.S. Dollar.
The above conditions denote wholesale liquidations, selling exhaustion, or market capitulation. However, the current bear market decline is the result of an external/exogenous event (Covid-19 pandemic). External event driven bear declines are far more difficult to forecast. Some external events end suddenly and return to its primary bull trend (i.e., Oct 1987 Index Arbitrage/Program Trading crash). However, sometimes, these external events can push the economy into a recession (i.e., 9/11 and 2000-2002 Tech/Telecom recession bear) leading to a deep and prolonged cyclical bear decline.
As we have noted before, tomorrow (Friday, 3/20/20) is quadruple witching expiration. Tomorrow is also the end of the week, and as such we will be recording our weekly closing prices for major market indexes including SPX. It is our contention SPX may be headed for yet another major inflection point. This time around, the weekly SPX close is potentially important as it may help to define a selling exhaustion period or a selling climax/market capitulation phase to the Feb 2020-present bear decline.
Although SPX may have recently violated its 12/26/18 intra-day reaction low of 2,346.58, surprisingly it is still trading above its weekly close of 2,416.62 (2/17/18) as well above its 61.8% retracement (2,444) from 2016-2020 rally. The ability of SPX to maintain above 2,416.62 on a weekly closing basis confirms a higher-low pattern. A higher-low pattern would be the first constructive technical pattern in the past 3-weeks and signals the start of a rebuilding period.
Given the technical damages incurred SPX is likely to encounter formidable overhead resistances on rallies. Key initial resistance is 2,681-2,706 coinciding with the convergence of the bottom of a 2-standard deviation Bollinger Bands, Feb 2016 uptrend breakdown, and the 38.2% retracement from its Feb-Mar 2020 decline. Above this resistance can extend the recovery toward 2,837 (50% retracement) and then to 2,968 (61.8% retracement). Key intermediate term resistance remains at 3,085-3,094 corresponding to the pivotal 2-year trendline breakout and the convergence of the 10-week and 30-week moving averages. Will a convincing breakout lead to the resumption of the 2009 structural bull? Or will a failure to clear this major supply zone reinforce a right shoulder to a 2-year head/shoulders top pattern?