Where the Market Goes Now

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We’re always looking for clues as to what might happen next on Wall Street.

Right now, traders are trying to determine whether the S&P 500 is going to:

1. Climb back up to its all-time high of 3,588.11

2. Consolidate for a while

3. Fall back down below 3,300

We think there are clues in the VIX.

That’s how our technical experts, John Jagerson and Wade Hansen, began their most recent Strategic Trader update.

In Strategic Trader, John and Wade combine fundamental and technical analysis, along with historical market data, to profitably trade options in many different types of markets.

Fortunately for us, the tools and indicators they use often provide key insights into short-term market direction.

So, what is the VIX that John and Wade referenced above? And what is it saying about where the S&P is going next?

That’s what you’ll find out today.

Plus, John and Wade explain how you can use the tools they’ll cover below. So, you’ll be able to get insights into market-direction anytime you want.

I’ll let them take it from here.

Have a good weekend,

Jeff Remsburg

 

Fear Index at Inflection Point

By John Jagerson and Wade Hansen

Stock traders are detectives — without fancy deerstalker hats or sidekicks named Watson, of course. We’re always looking for clues as to what might happen next on Wall Street.

Right now, traders are trying to determine whether the S&P 500 is going to:

1. Climb back up to its all-time high of 3,588.11

2. Consolidate for a while

3. Fall back down below 3,300

We think there are clues in the VIX.


The VIX

The CBOE S&P 500 Volatility Index (VIX) is known as the “Fear Index” because it is such a helpful gauge to measure how worried traders are that the S&P 500 might suddenly drop within the next 30 days.

When the VIX starts moving higher, it is telling you that traders are getting nervous. When the VIX starts moving lower, it is telling you that traders are gaining confidence.

Looking at the daily chart of the VIX in Fig. 1, you can see that the index has been in a down-trending channel since April, which has been a bullish signal for the stock market.

 

Fig. 1 — Daily Chart of the CBOE Volatility Index (VIX) — Chart Source: TradingView

 

However, the VIX appears to be at an inflection point.

While the index has been creating lower highs — the September high was lower than the June high, which was lower than the April high — and lower lows — the August low was lower than the June low — it may be setting up to create a higher low. That wouldn’t be welcome news to the bulls on Wall Street.

Here’s what we’re watching in Fig. 1:

1. If the VIX breaks through the current horizontal support level and starts dropping down toward number 1 on the chart, look for the S&P 500 to climb back up toward its all-time high of 3,588.11.

2. If the VIX continues to bounce up off the current horizontal support level at number 2 on the chart, look for the S&P 500 to consolidate for a while.

3. If the VIX breaks above down-trending resistance at number 3 on the chart, look for the S&P 500 to fall back down below 3,300.

We’re confident in this analysis because we’re seeing a similar setup on the VIX/VIX3M relative-strength chart.


VIX/VIX3M Relative Strength Chart

Most traders tend to focus solely on the VIX, which is, as stated before, a measurement of the anticipated volatility being priced into S&P 500 options for the next 30 days, when they think about measuring trader sentiment.

However, as we’ve covered in the past, sometimes focusing only on the next 30 days isn’t a long enough view. Sometimes it is helpful to expand your horizons out to the next three months, or 90 days.

When traders need a longer-term outlook, they can look at the CBOE S&P 500 3-Month Volatility Index (VIX3M), which is a measurement of the anticipated volatility being priced into S&P 500 options for the next 90 days.

By comparing the value of the VIX to the value of the VIX3M, you can identify periods when trader sentiment has turned extremely bearish and when it has normalized.

Because these volatility indexes measure the magnitude of the price movement traders believe the S&P 500 may make during the measured time frame, the value of the VIX3M is usually higher than the value of the VIX.

After all, if you give the market three months to make a move — like the VIX3M measures — instead of just one month — like the VIX measures — it has a greater chance of making a larger move.

Interestingly, there are times when traders will price in a greater chance of a larger move in the short term than in the long term because they are nervous the market is about to drop. This pushes the value of the VIX up higher than the value of the VIX3M.

The easiest way to compare the value of the VIX to the value of the VIX3M is to create a relative strength chart of the indexes where you divide the value of the VIX by the value of the VIX3M.

Typically, the VIX/VIX3M relative strength chart will have a value less than one because the value of the VIX is usually less than the value of the VIX3M.

During periods of high market stress, the VIX/VIX3M relative strength chart will often have a value greater than one because traders are pushing the value of the VIX higher than the value of the VIX3M.

So, where is the VIX/VIX3M now?

According to Fig. 2, the VIX/VIX3M is in a down-trending channel — just like the VIX — and is still well below one, but it too is at an inflection point.

 

Fig. 2 — VIX/VIX3M Daily Relative Strength Chart — Chart Source: TradingView

We’re seeing a setup on the VIX/VIX3M chart that is similar to the setup we’re seeing on the VIX chart.

Here’s what we’re watching in Fig. 2:

1. If the VIX/VIX3M continues dropping down toward number 1 on the chart, look for the S&P 500 to climb back up toward its all-time high of 3,588.11.

2. If the VIX/VIX3M remains at its current level at number 2 on the chart, or drifts higher, look for the S&P 500 to consolidate for a while.

3. If the VIX/VIX3M breaks above down-trending resistance at number 3 on the chart, look for the S&P 500 to fall back down below 3,300.


The Bottom Line for Next Week

So, what do we expect the S&P 500 to do this week?

We think option 2 is going to play out, meaning we will see more consolidation in the S&P 500.

The reason we’re confident in this assessment is found in Fig. 2. You’ll notice we put a number 4 in Fig. 2, and we didn’t put one in Fig. 1. That’s because the VIX/VIX3M relative strength chart provides additional information that the VIX chart simply can’t because it’s not a relative strength chart.

Currently, the VIX/VIX3M chart is below one. More importantly, it’s not just barely below one. It’s below one by quite a bit. This tells us that traders are not worried about a dramatic pullback happening anytime soon.

Since traders don’t appear to be too worried at the moment but are also still a little shell shocked from the profit-taking we saw in the technology sector two weeks ago, we think the S&P 500 is going to consolidate for a bit while traders regroup and figure out where they want to go next.

Sincerely,

John Jagerson and Wade Hansen

Editors, Strategic Trader


Article printed from InvestorPlace Media, https://investorplace.com/2020/09/where-the-market-goes-now/.

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