Can S&P support hold?


Will the S&P find bullish legs or a dip?…the indicator our technical experts are watching that looks bullish…how things have been the last three times this indicator has triggered

Will the S&P maintain its support?

This is the most pressing question facing investors right now.

A quick bit of context to make sure we’re all on the same page…

After falling sharply all year, the S&P staged a furious rally from mid-June that saw the index gain 17% over about a month.

For many bulls, this was proof that the bear market was over. For many bears, this was just a bearish rally.

Since mid-August, the S&P has now fallen back to its mid-June low. This suggests that it was a bearish rally.

But…

What if it was something technical traders call a “double bottom”?

In other words, what if the June rally was just the market’s first bull run? This attempt failed, but that does not mean a complete failure.

Instead, what if the S&P is now “double bottoming” or retesting its June low? And if he passes this test, then the rally will resume, but this time with more force.

This is the bullish hope.

In the table below, we show why this “decisive” level is so important.

We highlight the support level the S&P is at today, and we add a trendline showing the progression from the “lower lows” for the S&P over the year that we have extrapolated.

Here are the takeaways…

If the support holds, wonderful. All eyes will be on how quickly we can move back towards the 4,300 level to retest August resistance.

But if the S&P can’t hold support, then the “lower lows” trendline suggests we’re headed towards the 3300 area.

Source: StockCharts.com

Clearly, this is an important time for the markets and your short-term portfolio.

So, back to our opening question…

Will the S&P maintain its support?

According to our technical experts John Jagerson and Wade Hansen of Strategic traderwe have an excellent chance:

One of our favorite sentiment indicators tells us that traders have probably reached their peak point of pessimism. This is a strong contrarian signal that the bulls may start to regain some short-term momentum.

Today let’s take a look at John and Wade’s latest update to see why we shouldn’t be counting a bullish bounce.

How to turn the “fear gauge” into a crystal ball

For new readers, John and Wade are the analysts behind Strategic trader, the premier trading service from InvestorPlace. John and Wade combine options, insightful technical and fundamental analysis, and market history to trade the markets in all kinds of conditions.

Since mid-August, these conditions have been significantly lower. But there’s one indicator John and Wade are watching that leads them to believe that might be changing.

This is the CBOE S&P 500 Volatility Index, known as the VIX. Many investors know this. It is a measure of the expected volatility in the price of S&P 500 options for the next 30 days. A high VIX reading suggests greater anxiety among traders.

But John and Wade note that sometimes focusing only on the next 30 days isn’t a long enough view. It may be helpful to broaden your horizons to the next three months or 90 days.

For such a longer-term perspective, traders check out the CBOE S&P 500 3-Month Volatility Index (VIX3M). It is a measure of the expected volatility priced into S&P 500 options for the next 90 days.

And by comparing the VIX with the VIX3M, investors can get even more information.

Here are John and Wade:

Since these volatility indices measure the magnitude of the price movements that traders believe the S&P 500 may make over the time period being measured, the value of the VIX3M is usually higher than the value of the VIX.

After all, if you give the market three months to move – like the VIX3M metrics – instead of just one month – like the VIX metrics – it’s more likely to make a bigger move.

Interestingly, there are times when traders will factor in a higher probability of a bigger move in the short term than in the long term because they fear the market will go down. This pushes the VIX value higher than the VIX3M value.

The easiest way to compare VIX and VIX3M values ​​is to create a relative strength chart of the indices

Specifically, you divide the value of the VIX by the value of the VIX3M.

Under normal conditions, this comparison table will have a value less than 1. This is because the value of the VIX is usually lower than the value of the VIX3M.

But when traders are worried about an immediate market decline, the value rises above 1. This shows higher anxiety for the next 30 days compared to 90 days.

So where are we today?

Here is John and Wade with these details:

Currently, the VIX/VIX3M chart has been >1 for the past three days (see Fig. 2) [written on Wednesday].

Fig. 2 – Daily Chart of VIX vs VIX3M Comparison Chart (VIX/VIX3M)

This tells us that traders have pushed the market to maximum pessimism and are likely to stop and take a deep breath.

As you can see in Figure 2, traders have pushed the VIX/VIX3M above 1 four times over the past year.

So what happened to the S&P 500 when the VIX/VIX3M rose above 1?

As you can see in Figure 3, support was established on the S&P 500 whenever the VIX/VIX3M broke above 1.

Fig. 3 – S&P 500 (SPX) daily chart

Let’s dive into the details of those earlier “VIX/VIX3M > 1” moments.

Matching the red numeric dots in the chart above to how things went in the market, here’s what John and Wade found:

Point 1 – the S&P 500 established support at 4,500 and bounced higher.

Point 2 – the S&P 500 established support just below 4,200 and bounced higher.

Point 3 – the S&P 500 established support just below 4,200 and started bouncing higher. However, the Fed killed that supportive bounce when it raised interest rates by 0.50% on May 4 (the first time it had raised interest rates by more than 0.25% since 2000).

And that brings us to today at point 4. The level to watch right now is 3,650. As I write Friday morning, the S&P sits at 3,654.

Keep in mind that 3650 is not a “you shall not pass” battleship. line.

For example, the S&P has already dipped below 3,650 a few times this week, as you can see on the S&P 5-minute chart from Monday.

How much below the key 3650 level has the S&P been this week

Source: StockCharts.com

So, as long as the S&P remains in this general area, we are still “holding support”.

Putting it all together, here’s John and Wade’s latest takeaway:

Will the index rebound higher from this support level?

We think it has a good chance of climbing back towards 3,800. Wall Street already expects the Fed to continue to be aggressive in its rate hikes, so there shouldn’t be any big surprises in terms of Monetary Policy.

Until we get any dire economic surprises, traders may finally start buying the dip.

We’ll keep you posted here in the Digest.

Have a good evening,

Jeff Remsburg

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