Two years ago the S&P 500 Index began a monster rally that saw it surge over 100% to the February 2011 highs. Options trading investors are now staring at a rising wall of risk while corporate credit spreads remain bullish, corporations are able to expand margins and produce increasing profits, and Federal Reserve Chairman Ben Bernanke has declared that there are no inflationary concerns.
Right now investors have to weigh rising oil prices, geopolitical conflict in the Middle East, the threat of higher interest rates and inflation against the bullish backdrop. The price action in the broader market place is talking, but we have to listen with an open mind. There are two key price levels that are obvious when we look at a daily chart of the CBOE S&P 500 Index Options (CBOE: SPX). First of all, the SPX at the1331-1332 price level is acting as major resistance and holding the bulls in check. Should this level be breached to the upside on a daily close, we could see prices extend higher to test recent highs. The chart below illustrates the key upside level around 1331-1332.
However, it is important to note the bearish wedge forming on the SPX daily chart. If price can push below the recent lows around 1294, we should see an extension lower to the 1260-1280 area before support comes back into focus. If we were to test the 1260-1280 price level, it is hard to say where price action could go. We could see an extension higher which pushes to higher highs or we could rollover and test the 1250 price level below. I will wait until we get confirmation in either direction before making any major assessment, but for right now those are the key levels for traders to watch. The chart below illustrates the bearish wedge located on the SPX daily chart.