Since mid-February, the S&P 500 has broken out to new all-time-highs. As anticipated, during this breakout, market volatility (as measured by the VIX) has subsided. That is until today. The fear index (VIX) has broken out of a bullish falling wedge that took a little over a month to form. Not coincidentally, this breakout is taking place right near an expected resistance point, an upward trendline connecting previous VIX lows of July and December 2014 (marked with a green trendline on the chart below). As you might recall, we pointed out back in January that the VIX has been rising along with the S&P 500. With this new breakout in the VIX, this concerning market condition still exists. At minimum, we’ll see a retest of previous highs in the S&P 500. If those previous highs are taken out, a false move will be in play and we could see a rapid downward move in the market. From false moves, come fast moves. We’ll know we’re in that environment if the S&P 500 takes out the support area highlighted in gray below. This area marks where previous supply should turn into new demand. Those long this market want to see that area of demand hold. If it doesn’t, market participants will need to be nimble. Remember, “the market moves up the escalator, down the elevator.” Downward price movements are almost always more rapid and violent than any upward move. We need to be ready for this scenario. On the other hand, it would be extremely healthy for this market to test previous highs and move on to exceeding the February highs. If that takes place, we should see smooth sailing in the market for the intermediate future.
Trade safe. Don’t trade what you think. Trade what you see.
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click chart to enlarge