VIX and S&P 500: what’s next?

In an almost unnatural situation, with the S&P 500 Index going up whatever happened, at the end of January the correction arrived and the excesses were finally eradicated. But while professional traders had some relief with the arrival of this event, they were also concerned about the way the fall occurred: unexpectedly too fast and deep, almost -12% in a couple of weeks, and with an unthinkable increase in volatility.

Anyway, the moving averages are still positively inclined and the price level is still above the 200-day moving average (red line in the graph), so the medium-term trend remains positive.

What I would like to point out is that historically, when the volatility levels reached by the VIX indicator have been similar to what has happened in recent weeks, the price movements that have followed these phases are not linear trends, but rather continuous upward and downward direction changes with intervals of 1-4 weeks (zig zag waves), as we can see in the graph.

A significant minimum was already formed on February 9th, reaching the moving average at 200 days. This may be more than enough, but in past periods, as instability has continued, further new minimum prices have been formed: it is not a certainty, but a probability that could be considered. If we look to the the last bullish trend, which started after the period of laterality of the markets of 2014/2015, a first new possible correction level, could be around the 200 days moving average and the 38,2% Fibonacci retracement.

Mario Valentino Guffanti
CFTe – SAMT Vice President – Swiss Italian Chapter – mario.guffanti@samt-org.ch

Disclaimer: the above article is for general information and educational purposes only.  It is not intended to be investment advice.  Seek a duly licensed professional for investment advice.