A Look At Expected Volatility In The S&P 500 Following Bearish Reaction To Powell's Remarks

The Volatility S&P 500 Index VIX gapped up 5.13% to start the trading day Monday and spiked an additional 3% off the open where it ran into resistance just below the $28 mark.

The VIX is used to measure the expectation of near-term volatility in the stock market, and volatility is used to gauge market sentiment, specifically the level of fear that exists in the S&P 500.

On Friday, when the S&P 500 began to react bearishly to Federal Reserve chair Jerome Powell’s speech at the Jackson Hole Symposium, the VIX began to surge, rallying 15.77% off the open. Powell’s speech sparked fears the Fed is a long way from being able to effectively tackle soaring inflation, and that another big rate hike could be in the cards for September.

Technical traders may have predicted an impending downturn in the markets was on the horizon on Aug. 10 because although the S&P 500 surged 3.54% between that date and Aug. 16, the VIX found a bottom between those dates near the $19.50 mark. When the market moves higher and the VIX trades sideways, it can indicate fear is increasing.

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The VIX Chart: On Aug. 25, the VIX confirmed it was trading in a new uptrend by forming a higher low above the $19.50 area. On Friday, the VIX reacted to the trend by surging higher and on Monday printed a higher high within the pattern.

• Friday’s surge caused the VIX to reclaim the 200-day simple moving average (SMA) as support, which is a positive sign for bearish stock traders. It may make bearish traders concerned, however, that on Aug. 24, the 50-day SMA crossed below the 200-day, which caused a death cross to print. If the VIX is able to remain above the 200-day SMA for a period of time, the 50-day SMA will cross back above the 200-day, which will cause a golden cross to form.
• The long upper wick the VIX was working to print on Monday suggests lower prices may come on Tuesday, which indicates the stock market could trade higher. If the VIX falls lower, traders will want to watch to see if the VIX prints a bullish candlestick, such as a doji or hammer candlestick, to indicate the next higher low has printed, and the uptrend will continue.
• Bullish stock market traders want to see the VIX drop back down below the 200-day SMA over the next few days to keep the death cross intact. It should be noted that the 50-day SMA on the VIX hasn’t trended below the 200-day since Dec. 2, 2021.
• The VIX has resistance above at $27.75 and $29.82 and support below at $25.66 and $23.15.

See Also: Market Weakness Continues Following Powell's Warning Of Interest Rate 'Pain': Catalysts To Watch This Week