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S&P 500: ’Buy the Dip’ May Not Work as We March Towards a New Month

S&P 500: ’Buy the Dip’ May Not Work as We March Towards a New Month

Paul Robinson,

What’s inside:

  • U.S. indices showing vulnerability
  • Volatility has been compressed, March can often be a volatile month
  • Watching closely how the market responds to support for possible change in character; 'buy the dip' could soon become 'sell the rip'

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U.S. indices have been on a tear for all of February, but as of yesterday price action became unstable with a sharp morning break and afternoon rebound. The Nasdaq 100 put in an engulfing bar while the S&P 500 suffered a smaller set-back. At the time of this writing, we’re headed for a weaker open. Europe is taking it on the chin, with the DAX leading the way lower by about 1.5%, and the S&P futures following suit by heading lower by 10 handles.

With weakness in the near-term setting in, we’re starting to think about how far the S&P could decline before finding potential support. The first line of interest is the Feb ’16 trend-line about 25 handles lower. For now, all we can do is consider weakness as a pullback within an ongoing uptrend, but with volatility having been compressed for a few months, and March, an often-volatile month just ahead, we could be in for a bumpy ride. The CBOE Volatility Index (VIX) has a tendency of grinding sideways to lower for a few months then popping sharply – now may be the time for another spike to come.

S&P 500: Daily

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VIX: Daily

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With that in mind, we’ll be paying close attention to how the market reacts to support, as the pattern since the November low has been for weakness to be met quickly by buying. If that pattern begins to change, then we could have seen the best of the market for now. It may not be the ‘buy the dip’ theme we’ve become accustomed to, but rather a 'sell the rip' mantra we'll want to live by.

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---Written by Paul Robinson, Market Analyst

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.