The S&P 500 fell 19 points yesterday.
While that’s only a 0.67% decline from the all-time high it hit on Friday, it’s enough of a move to shift the immediate momentum of the market over to the bearish side.
Add that to the parabolic look of the S&P 500 chart I showed you yesterday, and things could get rough over the next several weeks.
But before we get too bearish, let’s keep an eye on the Volatility Index (VIX)…
The VIX closed above its upper Bollinger Band yesterday. As you may recall from an essay I wrote earlier this month, when the VIX closes back inside the bands, it will generate a new buy signal for the broad stock market.
The blue circles on the chart show the eight previous VIX buy signals since the start of 2017. Each signal marked at least a short-term bottom for stock prices. The S&P 500 moved higher every single time.
We got the first buy signal on 2018 on January 19. The S&P 500 then gained 80 points over the next five trading sessions.
So, as much as I’d like to tell you definitively that the market has reached the exhaustion phase of the recent rally, and now it’s time to get aggressive with short positions – I can’t do that. The market isn’t going to make it that easy.
Instead, here’s what I think is the more likely scenario…
The VIX may spike slightly higher over the next day or two as the S&P 500 tests the support of its 5-day exponential moving average (EMA) – which has been its primary support line all month – at about 2847. If that level doesn’t hold, then look for a decline to the 9-day EMA at about 2830.
At that point, the short-term technical conditions should be oversold enough to help fuel a modest bounce. That’s when the VIX will likely close back inside its Bollinger Bands and generate another buy signal. And that’s when we should see another few days of strength and maybe a rally back up near last Friday’s high.
Traders can then look for overbought and/or diverging technical conditions as a chance to get more aggressive on short positions in anticipation of a move lower over the next several weeks.
Best regards and good trading,
Today, a note from a former option trader…
Have been self-directing my portfolio for about 15 years. Have tried options and, overall, been successful at it. Have used naked puts extensively and covered calls here and there.
But I simply don’t want to trade options anymore. There’s something about it that makes me anxious. I feel exposed to loss the whole time the position is open and the time decay just eats at me.
That being said, I love reading the Market Minute. And publishing good, bad, and ugly reader feedback is awesome. Keep up the great work.
– David M.
And an interesting theory…
Jeff, love your service and your approach. A random thought. As the dollar weakens, gold goes up. Could it be that some of the fuel for the rise in the S&P is people looking at the S&P as an asset like gold?
– William B.
If you have a trading story to share, or any questions or suggestions, don’t hesitate to send them in.
In Case You Missed It…
On February 8 at 8 p.m. ET, one of the most noteworthy events in Bonner & Partners’ history is taking place: The Legends of Finance Summit.
During this historic event, you’ll learn how to profit from Bill Bonner’s Trade of the Century – and how legendary speculator Doug Casey used this concept to build a multimillion-dollar fortune over five decades. Details here.