OPEX is gone, what's next, 4300?
After-market commentary for May 18, 2023. Prepared by the Point-Blank-Trading team in collaboration with Román González.
REVIEW
Continuing with the narrative of the debt ceiling, today there were further advancements towards reaching a bipartisan agreement. Naturally, the optimism stemming from this news encouraged the market to push the indices higher for the second consecutive day.
Also, as an important highlight of today´s activity, we kept an eye on Walmart (WMT) as they reported their earnings, which would provide investors with an insight into the current state of the economy. As a result, Walmart has beaten expectations and has an optimistic outlook for consumer spending growth of 3.5% by the end of the year.
In the Chinese stocks front, Alibaba (BABA reported today and exceeded revenue expectations for the first quarter, providing some relief to investors in the sector.
The semiconductor sector was also a high-flyer, pushing the market higher as Nvidia (NVDA) rose almost 5% today. Unstoppable.
Netflix (NFLX), skyrocketed almost 10% acting as a big engine in today’s rally.
INDICES
All major indices followed today the bullish trend upon the announcement of the progress made in the debt ceiling negotiations, as mentioned by Senator McCarthy. This caused the indices to break their current resistances with higher volume than yesterday.
SPX, QQQ, and FAANG rise rapidly showing bullish signs as they follow through the Bullish Engulfing Candlestick pattern formed yesterday.
DJI after touching the 50DMA as initial support, broke through the 100DMA, which became the current support as of today´s close. Unfortunately, although it attempted to cross the 20DMA, it was stopped there.
IWM decided to retest the 50DMA, which acted as good support before continuing to rise and breaking out of its consolidation range. Good move today for small caps.
DJT, also went up, but did it in lighter volume than yesterday. In addition, the conjunction of the 20DMA and the 200DMA managed to reject DJT, which despite having surpassed those levels during the day, could not maintain it and ended up closing at that point of congestion.
VOLATILITY
VIX and VVIX continued to be trapped in their downward trend. The crossing of 20DMA above 50DMA is not going to occur as 20DMA turned down three day ago, and now the trend of both moving averages is moving in opposite directions.
MARKET BREADTH
Even though SPX is at the highest levels of the year, our Market Breadth heatmap shows that more than half of its components are still below their 50DMA and 200DMA, that’s a negative divergence. This only confirms that the upward movement has been engineered by a few large-cap stocks, the horses pulling the cart. Whenever the horses get weak or sick the SPX rally will have no legs to run on. We would like to see these indices move above the 50% level soon to have more confidence, meanwhile we will continue to trade the tape.
Our favorite indicator of SPX inner health managed to cross the 200DMA and is now facing the 20DMA and 50DMA at the same resistance level. The indicator remains below the 50% level, indicating that despite today's positive session, there are still broken aspects within the market. Here is a chart showing the market breadth of main indices after today´s close.
SUMMARY
Is SPX headed to 4300?
So far the momentum of the techs has been enough to drag all the indices higher. Yesterday there was even a breadth thrust as there was a ratio of 4 advancers for every decliner in the NYSE.
We are still concerned about the internal health of the SPX, but it is not hopeless, it can be cured with more up days and slight declines. What would not be good is if it continues to deteriorate.
4200 is a big wall that once it is surpassed (everything seems to indicate that it will be), and if market participation improves, we would have no doubt that 4300 could be the next big stop.
A word of caution:
Don't get carried away by the bullishness, always be cautious. Some of the leading stocks are very close to resistance and the SPX has yet to close solidly above 4200, so a pullback is not off the menu.
It is possible that the market will open very close to 4200 for OPEX settlement, but watch for what happens after that with the weekly expiration which is settled at 4:00pm ET.
There is significant call volume above 4150, apart from a good number of calls at 4200 for tomorrow's weekly expiration, the excess of calls far from being bullish could be bearish, it remains to be seen what the 0dte consensus will be.
See you in the morning. Have a good night rest.