Will Negative S&P 500 Sentiment Continue to Unwind?

The S&P 500 (SPX) is facing potential resistance around the 5,995-6,000 level, coinciding with its pre-Inauguration close and a key millennium mark, while also exhibiting a possible bearish RSI divergence. Despite recent gains and a bullish signal from a May 19 'outside day,' the index's advance above 6,000 was marginal, and a rising 10-day put/call volume ratio on SPX components suggests increasing caution, although high short interest could fuel a rally; key support levels to watch are the 20-day moving average at 5,900 and the 2024 close at 5,882.

Analysis

The S&P 500 Index (SPX), trading roughly 2.5% below its February all-time highs, is currently navigating a critical juncture around the significant 6,000-millennium mark and its pre-Inauguration close of 5,995. These levels previously acted as a short-term top in mid-November and now present immediate resistance, despite the index marginally breaching 6,000 recently. While a bullish 'outside day' signal on May 19 resulted in a two-week gain, the 0.1% return was substantially below the historical average, which has now declined from 3% to 2.8%, indicating diminished bullish follow-through. This cautious outlook is amplified by a potential bearish Relative Strength Index (RSI) divergence, with the SPX setting new May highs but its RSI failing to confirm. Sentiment indicators are mixed: an increasing 10-day buy-to-open put/call volume ratio on SPX components, historically a precursor to market weakness, signals caution. Conversely, a recent buildup in SPDR S&P 500 ETF Trust (SPY) puts amid rising prices is viewed as a contrarian positive, representing potential sidelined capital, and high short interest on SPX components, near multi-year peaks, could fuel rallies via short squeezes. The SPX 6,000 strike has substantial call (approx. 240,000 contracts) and put (approx. 220,000 contracts) open interest for the June 20th expiration, suggesting this level might act as an anchor. Immediate support is identified at the ascending 20-day moving average (currently 5,900), followed by the 2024 close at 5,882 and the 5,783-5,800 zone, highlighting a short-term neutral technical backdrop with slightly more downside potential to support than upside to the 6,000 resistance from the early June perspective.

Key Decisions for Investors

• Investors should closely monitor the S&P 500's interaction with the critical 5,995-6,000 resistance zone, as a decisive breakout or rejection will likely dictate near-term market direction towards support levels at 5,900 and 5,882.
• Given the conflicting signals of a bearish RSI divergence and rising put/call ratio against high short interest and contrarian put buying, maintaining a cautious stance while being prepared for potential short squeezes or range-bound trading around the 6,000 level is prudent.
• Note the significant options open interest at the SPX 6,000 strike for the June 20th expiration, which may exert a pinning effect on the index, and consider strategies that account for potentially constrained price action around this level in the lead-up.