S&P 500: Fear Rising, Breadth Sinking

What’s inside:

• VIX (‘fear barometer) spike unusual versus the relatively small decline in the S&P 500
• Breadth becoming oversold, but not at an extreme yet
• Watching VIX/breadth developments in conjunction with price behavior

The S&P 500 is thus far making good on the bearish weekly reversal bar from overhead resistance above 2100, at least to start out the week. Our first level of support penciled in was 2085, which proved to be little challenge in breaking yesterday.

The S&P is currently challenging the 2070/72 area, and if this should give way then minor support comes in around 2060/57, but there isn’t anything truly substantial to speak of until the S&P trades down into the 2040/25 zone.

The most obvious point of resistance at this time is the 2085 level (the ‘old support, new resistance-thing’).

SPX500 Daily/2-hr

During the past two days we have seen an unusually large spike in the VIX (‘fear barometer’) relative to the decline in the market. These spikes occur when options traders buy protection against adverse market movement. The VIX spiked 43% from Friday through Monday while the S&P 500 lost only 1.7%; unusual stuff. Clearly there is a repricing going on with where volatility ‘should be’ after a prolonged period of complacency.

Volume in VIX options yesterday ranked #3 all-time according to the exchange they trade on, the CBOE. Granted, VIX options haven’t been around for but a few years, but still when looking at the top 10 occurrences back to late 2013 this type of event has typically occurred not long before a bottom or a bounce at the least.

The percentage of stocks in the S&P 500 trading above the 10-day MA is at a 4-month low (+22%), but hasn’t become extremely oversold yet; this generally doesn’t occur until under 20% (closer to 10%).

SPX w/VIX and Breadth

What does this all mean? Not much yet. These are factors worth keeping an eye, though, in conjunction with support and resistance levels and how the market reacts to those levels. The market remains at risk of further downside in the near-term, but should we see positive developments at key support levels along with further extremes in the VIX and breadth, then we will be ready to react, whether that be in covering existing short positions and/or establishing long positons.

The ideal scenario from where we sit: Continued selling into the 2025/40 zone along with a higher VIX and deeply oversold breadth.

What characteristics do successful traders have in common? Find out in our guide, “Traits of Successful Traders.”

---Written by Paul Robinson, Market Analyst

You can follow Paul on Twitter at @PaulRobinsonFX.