On Friday in the US, SPX closed at 3714.24 or -1.93% on moderately negative internals, a 10% spike in the implied volatility index and a red sector profile. The action was hard to trade but the selling had an organized feel to it. The futures saw two-sided trade with a bounce from an overnight low of 3721.50 and drive to the cash session high of ES 3770.25 during the initial balance (first hour of the regular trading session). The SPX high was 3778.05, but internals soon deteriorated and selling took us to the lows of the day by early afternoon, where the SPX 50 day moving average was hit just as the ES futures stopped above the regular trading hours low from Wednesday. Sellers kept things moving lower on increasingly bearish internals to just under the SPX 3700 area, followed by some bouncing back toward 3730/3740 and then a final selloff, with futures going lower after the cash close.
The ES futures point of control ended up at 3708.75, at the lower end of the profile and pretty much on the 50-day average. ES value (70% of activity) migrated to the lower end of the profile as well, overlapping Thursday's value area to the downside. This on its face is bearish, but shorts will be careful about a reflexive move higher if we can hold current support.
Support near the 50 day is partly technical and partly a function of the hedging situation. If the SPX 3700 area or even the ES 3685 area can be held, shorts risk a covering rally. This could be initiated by adjustments in hedging that can happen if participants sense that the liquidity risks associated with last week's events are under control. Traders will watch the VIX closely, because if it goes down precipitously, this is a clue that shorts are getting out temporarily. If implied volatility (VIX or VX) moves toward its previous mean (before last week's drop), this can cause rapid hedging by those who have bought and sold protection -- and then a snap back toward 3770. However, given Friday's false move higher, traders will probably be a bit skittish. On more headline weakness we obviously risk a trip to the 4 Jan RTH low of 3652.50 or even the 3625/3600. For future reference, keep in mind that we are still about 2% above the NDX 50-day average. Obviously, large cap tech is the largest influence on the SPX. The weekly support and implied volatility picture will be clearer before the cash market open on our Monday, after Australian markets have closed for the day. Therefore, this will need to be updated.
General caution is warranted because the VIX did bounce around and there were some false signals on Friday. If you are trading anything related to these indices, be aware that unless you are watching this as it happens, it is difficult to judge the character of moves around support levels. It is all well and good to say if the 3700 area holds, but you must see how it holds (market internals, sector strength etc.) to know how traders will react. Also be aware that overnight futures are lightly traded and influenced by Asia and Europe -- even if they can give clues to what will happen later in the day.
