Market Update - VIX and S&P 500

Click on Chart to Enlarge

Click on Chart to Enlarge

The top chart above is of the S&P 500 ETF (SPY) and is a daily chart. The bollinger bands overlay the chart and a MACD is plotted below. In past posts I have mentioned that I always look at gaps as points of significance. There is an unfilled gap up in SPY at around 84.00. Other than major breakaway gaps, most gaps will get filled relatively soon. This is one reason I expect price to come back down at least to 84.00. Also, despite a historic decline in the markets, there has not been a classic divergence of technical indicators indicating a bottom. A move to new lows will likely show technical divergence and set up a better market rally.

I think the most likely scenario is a quick move under 84.00, lasting 1-2 days and then a reversal. I will look to aggressively trade any reversal and recommend a trade on SSO which will profit approximately twice the amount of the general market averages.

There are many seasonal and historical statistics suggesting the potential for a big move up in stocks, but my opinion is that the market has not inflicted enough pain and confusion just yet to stage that rally.

The lower chart above is the VIX. This is a gauge of investor fear and willingness to over-pay for options, which are commonly used to protect stock portfolios. If the decline in stock holds today, the VIX will close above the 20 day moving average. The traditional target would be the upper bollinger band if this occurs. So, I will look for the VIX to move near its upper band and the S&P to move below its lower band. At that point, I will just be waiting for a classic reversal pattern.

Pete