The S&P 500 Volatility Index ($VIX) reached an extreme five days ago that could foreshadow a pullback or top in the stock market. The chart below shows the VIX with Bollinger Bands. Notice that the indicator moved below the lower band on September 3rd for the first time since April. Even though I was alerted of this signal last week (hat tip to Howard), stock market conditions did not seem ripe for a top. After all, the S&P 500 had just surged off support with a big move on September 1st. With the VIX back near its 3-Sept low, I am revisiting this signal as a sign of excessive optimism in option volatility that signals above average risk of at least a pullback. These signals are not exact and there can be delays. The April signal triggered about two weeks before the S&P 500 peaked.
On the daily chart, SPY surged to resistance with a gap up on Monday and finished the day with a doji. These candlesticks signal indecision. The indicator windows show the Commodity Channel Index (CCI) in overbought territory (>100) and 1-day Average True Range (ATR) below 1 on Friday. This indicator shows that Friday's range was the lowest since the second week of April. The red dotted lines show when CCI is overbought and ATR moves below 1. This combination foreshadowed tops in mid June and early August. With SPY near resistance, VIX at an extreme, CCI overbought, an indecisive doji and a narrow range day on Friday, the odds of a pullback are increasing significantly. It is hard to say when exactly because the June peak was sharp and the early August peak took 5-6 days to evolve.
On the 60-minute chart, SPY has now gapped up four times in September. That's four of the last eight days. There sure is a lot of buying interest on the open. Except for the first gap (1-Sept), there has not been much follow through after the gap. Nevertheless, the ETF remains in a clear uptrend as the gaps hold. I am raising short-term support to 110.5. Broken resistance, Thursday's gap and Thursday's low combine to mark a support zone around 110.5-111. RSI remains in bull mode and has yet to even test its support zone around 40-50.
Key Economic Reports:
Tue - Sep 14 - 08:30 - Retail Sales
Tue - Sep 14 - 10:00 - Business Inventories
Wed - Sep 15 - 08:30 - NY Empire Manufacturing Survey
Wed - Sep 15 - 09:15 - Industrial Production
Wed - Sep 15 - 10:30 - Oil Inventories
Thu - Sep 16 - 08:30 - Jobless Claims
Thu - Sep 16 - 08:30 - PPI
Thu - Sep 16 - 10:00 - Philadelphia Fed
Thu - Sep 16 - 16:30 - Fed Balance Sheet
Fri - Sep 17 - 08:30 - CPI
Fri - Sep 17 - 09:55 - Michigan Sentiment
Charts of Interest: ABX, BBY, CQB, EMR, FDX, LIZ, WDC, YHOO
This commentary and charts-of-interest are designed to stimulate thinking. This analysis is not a recommendation to buy, sell, hold or sell short any security (stock ETF or otherwise). We all need to think for ourselves when it comes to trading our own accounts. First, it is the only way to really learn. Second, we are the only ones responsible for our decisions. Think of these charts as food for further analysis. Before making a trade, it is important to have a plan. Plan the trade and trade the plan. Among other things, this includes setting a trigger level, a target area and a stop-loss level. It is also important to plan for three possible price movements: advance, decline or sideways. Have a plan for all three scenarios BEFORE making the trade. Consider possible holding times. And finally, look at overall market conditions and sector/industry performance.
About the author:
Arthur Hill, CMT, is the Chief Technical Strategist at TrendInvestorPro.com. Focusing predominantly on US equities and ETFs, his systematic approach of identifying trend, finding signals within the trend, and setting key price levels has made him an esteemed market technician. Arthur has written articles for numerous financial publications including Barrons and Stocks & Commodities Magazine. In addition to his Chartered Market Technician (CMT) designation, he holds an MBA from the Cass Business School at City University in London.
Learn More
