The S&P 500 Index (SPX) is currently between its 20- and 50-day moving averages and is below double the 2020 March closing low. This technical situation could lead to choppy market action. Historically, September experiences a downturn after options expiration week (OPEX), with a low typically forming in the first two weeks of October. There may be risks of a post-expiration drop, so it would be wise to exercise caution when making new longer-term positions or consider reducing existing positions.
– Monday Morning Outlook, September 11, 2023
In last week’s commentary, we mentioned the potential for further choppiness in the market as we enter a traditionally weak seasonal period in the two weeks after September standard expiration week. The market indeed exhibited choppy behavior last week after a strong turn during August expiration week.
During August expiration week, the SPX broke below its 50-day moving average and the level that is twice its 2020 closing low. This led to a sell-off driven by delta-hedged positions, causing the index to reach its 80-day moving average by the end of the week.
Last week, the index fluctuated around its 50-day moving average and double its 2020 closing level. The SPDR S&P 500 ETF Trust (SPY) also moved between its put-heavy 445 strike and call-heavy 450 strike. The ETF briefly experienced selling when it fell below the put-heavy 445 strike, but found support at its September low in the $443 area. The SPX’s low was at the 4,440 level.
Since early August, when the last Fed rate hike occurred and the U.S. debt was downgraded, the SPX and Nasdaq Composite Index (IXIC) have struggled to find direction. This suggests an equal footing between bulls and bears in recent weeks, although bulls have maintained higher ground since the beginning of the year.
As we enter the second half of September, there are multiple potential support levels just below the current level. These include the 4,440 level, which represents the June highs and the close before the break below the bottom rail of the channel since the March lows. The 80-day moving average, which acted as support in August, sits at 4,420, with the round 4,400 level not far below. If the SPX follows its average 1.1% retreat for September, it would end the month slightly above Friday’s close at 4,450.
Potential resistance levels are also present. The 50-day moving average and the level that is double the 2020 close are in the 4,470-4,482 area. Above that, bears may gain control at the 4,500 level and the most recent closing high at 4,515, which coincides with a potential trendline resistance formed by the highs in late July and early September.
“If policy makers want to send a hawkish message through the dot-plot, they could keep the hike on the table for this year, reduce the amount of cuts penciled in for 2024, and move up the (in)famous R-star, the invisible neutral, long-term rate.”
– Bloomberg, September 14, 2023
The main event this week is the Federal Open Market Committee’s (FOMC) meeting. Traders in Fed funds futures are almost unanimous in their belief that the Federal Reserve will keep rates unchanged. However, if the Fed surprises and raises rates at this meeting, it could create volatility in the market.
Even if the Fed meets expectations and maintains its pause in rate hikes, Wednesday’s meeting could provide more clarity and direction for investors compared to the previous weeks of aimless trading.
Pay attention to the discussed SPX levels to gauge whether the market sentiment tilts in favor of the bulls or bears.
Todd Salamone is the Senior V.P. of Research at Schaeffer’s Investment Research.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
