While last week’s volatile see-saw action blurred market support levels, after Monday's furious dump which saw an unexpectedly high number of heavy sell programs which pushed the NYSE TICK indicator below 1,250 on an unprecedented 18 occasions, the S&P 500 definitively broke down on Friday below all support levels that BMO's Russ Visch considers valid.
Key barometers of market health such as the various Advance-Decline lines Visch follows as well as other broad measures of equity participation such as the Russell 2000 index have also broken down, so - as the BMO strategist writes - "this sell-off is really beginning to fire on all cylinders now."
There is still some tentative support for the index at the early 2018 lows in the 2530-2560 zone - with the S&P closing smack in the middle of these two numbers - but the swing target measurable on Friday's close below 2630 is 2445.
Meanwhile, a key number that traders watched today was 2,532.69 on the S&P 500: that's the intraday bottom touched on Feb. 9, which until Monday was the lowest trading level of the year, when it was briefly breached in the last 15 minutes during a massive $2.5 billion "market on close" sell imbalance, before the index staged a feeble rebound, finishing at 2,546, the lowest closing level since October 2017.
As a result, now that the 2018 intraday low has been breached Visch writes that "a move to 2445 makes a lot of sense to us, since a close below the early 2018 lows will likely cause the “rush for the exits” which brings the heavily negative, one-sided bearish climactic action that’s been missing so far."
But wait, there's more.
If Monday's action wasn't fun enough, this Friday we prepare to send off the year with a quadruple expiration, a day in which all four of the different types of options and futures contracts expire on the same day. Historically, quad witching weeks tend to be extremely volatile as large derivative positions are rolled over.
And here is the kicker: since 1990 the average weekly spread between the high and low for the S&P 500 during December quadruple witching weeks is 3.11%. That doesn’t sound like much but it’s nearly twice the 25 year average and using Friday’s closing data would result in a potential range of 2679 on the high side and 2518 on the low side for the S&P 500 this week.
Given Visch's bearish take noted above, he is "obviously leaning towards the latter."