Market Analysis

The Key

After weeks of rallying on low volume on virtually no 2 way price discovery and relentless volatility compression the inevitable has happened: $VIX has busted out of its latest compression phase for another big spike very similar to what we saw this summer.

In process most of the November gains were wiped out in 3 days. What does this mean for the rally? Let’s have a look at a few key charts.

Firstly, like this summer, the $VIX burst targeted an open gap above, the 17/17.5 gap left open following the Fed’s QE announcement:

And like this summer $VIX has become short term overbought and like this summer $SPX broke its up trend in the process.

Hence on the surface this is all a very similar looking replay of structures.

But there is a difference. Since the massive liquidity injections by the Fed began $SPX managed to break above the megaphone and rallied until it hit trend line resistance last week:

Oh yes, markets can be this simple, trend lines matter:

And so the rejection of $SPX makes perfect technical sense.

In the summer I had pointed out that a breakout above the megaphone trend line that gets successfully retested would be bullish, likewise a retest that fails would be bearish.

Today $SPX is engaged in that retest process and it’s key that bulls defend this trend line:

A couple comments:

One: During the recent rally the RSI became the most overbought in 2019.

Two: In October $SPX broke above resistance (yellow line), and has now reverted and is retesting this line as support. If a bounce can hold and make new highs from here it’s bullish. If it can’t hold support or a bounce fails to make new highs this would suggest a potential move to the lower trend line 3000-3030 support. If that breaks watch out, things could get very shaky in markets.

Three: $VIX broke out of its most recent compression pattern and filled its open gap of 17/17.5 today. Hence resistance and reversal intra-day now along with $SPX are support conducive for a bounce/rally.

But should support fail on $SPX, $VIX has risk higher. There are 3 trend lines above that suggest resistance on any $VIX spikes. Above the first line the secondary line suggests 21/23, the next larger line, if the previous doesn’t hold, suggests a move toward 27/28.

Of note: Despite successive marginal new highs on $SPX $VIX has maintained a general trend of higher lows. Hence if $VIX were to break above all of these trend lines we may see a revisit of the 30-50 range.

Unfathomable? Not really if you look at $NYAD:

Here too we can observe a very repetitive structure, in this case a large channel that is now sitting at key support.

When the 2018 channel broke it led to a very ugly period for markets marked by a period of very high volatility with lots of long and short trading opportunities. Indeed the chart above suggests key trend line support below on $SPX should this $NYAD channel break to the downside.

If it does and $SPX experiences a more sizable correction than currently, bulls are faced with a larger issue: That the megaphone breakout was false and did not sustain. As I outlined in Game Over? $VTI is sending a different message altogether.

So yes, defending these support zones here is key for bulls. Falling below the megaphone trend line would risk that markets are repeating the pattern that we’ve seen over the past 2 years: That new highs are not sustained. The September 2018 highs petered out 3.5% above the January 2018 highs. The July 2019 highs petered out 3% above the September 2018 highs. In all of these previous cases we saw sizable corrections off of new highs. These highs here have so far ended at 4% above the July 2019 highs.

And now bulls need to prove that they can sustain new highs. It is key for how the rest of 2019 plays out.

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Categories: Market Analysis

9 replies »

  1. Pingback: The Key? | ValuBit
  2. “If a bounce can hold and make new highs from here it’s bullish.”

    This is your buy signal??

    No, if this happens the horse has well and truly bolted….and then lapped you.


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