U.S. stock indices are experiencing a significant pullback after reaching lows in April and are now at a crucial decision point. The S&P 500 notably rose above its 100-hour moving average today after starting higher, but weaker ISM non-manufacturing data affected its momentum. Previously, the S&P dipped below its 200-hour moving average due to a disappointing jobs report, signaling a bearish trend. While the index managed to recover above this level yesterday, it faced resistance at the 100-hour moving average. Today, the market couldn’t maintain its gains, which further dampened bullish sentiment.

Potential Downside Targets

The 100-hour moving average, currently at 6330.86, has become resistance. If sellers continue to push lower, the next target is the 200-hour moving average at 6270.48. A drop below this level would increase bearish pressure, with further downside targets at the 38.2% retracement of 6242.21, followed by the 50% mark at 6185.13. The S&P index has dropped 33 points, or 0.54%, bringing it to 6295.66. The NASDAQ and Dow have also seen declines of 0.59% (124.86 points) and 0.50% (218 points), respectively. With the S&P 500 unable to stay above its 100-hour moving average at 6330, the market is showing signs of losing short-term momentum. This technical weakness indicates a likely downward trend in the coming days. For derivative traders, this suggests a shift from a bullish to a neutral or bearish approach. The market downturn aligns with economic data pointing to a slowing economy. Today, the ISM Services PMI fell short at 50.2, barely above the contraction threshold and significantly below expectations. This follows last Friday’s disappointing jobs report, which revealed that only 155,000 jobs were added, falling short of the forecasted 200,000. In light of this, traders might consider buying put options with strike prices just below the next major support level at the 200-hour moving average of 6270. Specifically, weekly or monthly puts with a 6250 strike could be a way to profit from a breakthrough of this support level. This strategy would also guard against a sharper drop toward the next target at 6242.

Volatility and Options Strategies

The market’s anxiety is evident in the CBOE Volatility Index (VIX), which has risen to 18.5 from the low teens last month. Increased volatility makes options more expensive, so an alternative strategy is to sell out-of-the-money call credit spreads. By selling a spread with a short strike above the 6330 resistance level, traders can collect premiums while betting that this recent high will not be surpassed in the near future. If sellers manage to push the index below the 200-hour MA at 6270, the Fibonacci support level at 6242 will become the next focal point. If this level fails to hold, it would confirm a deeper short-term bearish trend. Traders may then consider rolling existing puts down to lower strike prices to take advantage of additional downside. We observed a similar technical breakdown following weak data during the second quarter of 2024, demonstrating how quickly sentiment can shift. This period led to a sharp 5% correction before dip-buyers entered the market again. This historical context suggests that while the immediate outlook appears weak, conditions may change swiftly. This economic weakness has also influenced Federal Reserve policy considerations. Fed funds futures now indicate a 60% chance of a rate pause at the September FOMC meeting. Any continued signs of economic slowdown could heighten expectations for a rate cut before year-end. This factor could provide support for the market if the current downturn persists. Create your live VT Markets account and start trading now.

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