The S&P 500 Nears A Critical Support Level As Rates and Oil Surge

Stocks finished the day lower, with the S&P 500 down about 40 bps, but the decline was probably worse than the index suggests, since the RSP ETF fell nearly 1% while Meta rose more than 6.5%, offsetting some of the weakness.

The technicals reveal just about everything we need to know. The 7,630 level has been strong support, largely because a high level of option gamma sits there. Once that option gamma is gone, the index could start to slip more quickly toward 7,600. But after that, there is nothing underneath until 7,500, which could come quickly if we were to gap lower at the open tomorrow.

So the index has put itself in a vulnerable position, and the downside could become a slippery slope. With a number of macro headwinds currently in place, any one of them could be the trigger event at this point.

Rates are one of those headwinds, with the 10-year Treasury yield moving above 4.8% and closing at its highest level since November 2023, at nearly 4.85%. A move up to 5% doesn’t seem so unrealistic at this point.

Meanwhile, USD/JPY strengthened a bit more today, but it still has some breathing room, with support firmly around 152.25. A break of that support would likely push USD/JPY lower, perhaps into the upper 140s, which could start to weigh on risk assets globally.

WTI easily broke through resistance today at $94 and is now above its upper Bollinger Band, with the RSI scraping up against 70. It may be positioning itself to consolidate for a few days, but I think WTI ultimately heads higher, with the potential to reach $101.

Tomorrow is the Producer Price Index, and markets will be watching those PCE components closely. Those components will likely determine whether the PPI report is viewed as hot.

-Mike

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Glossary by ChatGPT

Bollinger Band — A volatility-based technical indicator that plots bands around a moving average using standard deviations.

Gamma — An options Greek measuring the rate of change in an option’s delta as the underlying asset price changes.

Option Gamma — The aggregate gamma exposure from options positioning that can influence dealer hedging flows and underlying market price behavior.

PCE Components — Elements within economic reports that feed into the Personal Consumption Expenditures price index, the Federal Reserve’s preferred inflation measure.

Producer Price Index (PPI) — A measure of changes in prices received by domestic producers for their output.

Relative Strength Index (RSI) — A momentum oscillator measuring the speed and magnitude of recent price changes, typically on a scale from 0 to 100.

RSP ETF — The Invesco S&P 500 Equal Weight ETF, which gives each S&P 500 constituent approximately equal weighting and can provide a broader view of market breadth.

USD/JPY — The currency pair representing the number of Japanese yen required to purchase one U.S. dollar.

WTI — West Texas Intermediate, a benchmark grade of U.S. crude oil commonly used as a reference for oil prices.

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