Last Monday the VIX was coming into the day below 30 for the time since August 3rd. Last Monday, the Dow shed over 200 points. Fast forward to today, when the VIX was coming into the day below 30 for only the second time since August 3rd and what happened? The Dow shed over 200 points. What’s more important is what happened the next day and the rest of the week, the market went on to rally to new highs for the week. Will the same pattern play out this week? Well, that’s why we wake up every morning and play the market, but the VIX should provide some clues.
The last time the S&P500 closed below 1,195 (an area of previous resistance) was 10/7, where did the VIX close that day? At 36.20, and it hasn’t been able to close above the 35 level since. So our thesis is this: as long as the VIX fails to close above 35, then this pullback that started on Tuesday should likely be bought. That’s not to say a close above 35 on the VIX will automatically lead to a further breakdown in the markets. But we wouldn’t be surprised to see such an occurrence coincide with a move down to the 1,150-1,170 range on SPX.
The other working in the bulls favor when examining yesterday’s sell off is volume. SPY (the ETF that correlates with the S&P500) traded 238 million shares on Tuesday, this was below the 10 day volume average of 243 million, and well below the early October average of 300+ million. This points to less aggressive selling amongst the bears and is constructive of a healthy pullback. The main thing now will be that the volume stays below average, as a red day on volume of 280-300 million shares on SPY will certainly be something to notice and likely change our opinion. For now, the bulls have showed us enough over the last few weeks that they deserve the benefit of doubt until something dramatic happens.
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