On Sunday, 12th July we wrote that we were expecting a major volatility drop for the new week, and perhaps that dropp could also be the last drop. This translated to a market rally last week, so would this be the last leg up?
Well, volatility ended last week in the red while markets rallied after 4 straight weeks of losses.
There is something which we did not anticipate and which might be about to occur; if we take into consideration today's drop of the VXO (the rest of the volatility indexes have edged up), the S&P500 futures contract has closed at the 946 level. If you have been following this blog for the last couple of weeks, we have used the phrase: "there is no going back to the 950 level at least in the short term", well we are just four points of reaching that level. What this proves again and again is the little relevance that resistance and support levels in the stock indexes have when you are using volatility as your major tool for forecasting, especially as is the case when you are trying to catch a market top. Said with different words, usually in an uptrend which we have had since March, volatility drops lead to higher gains in the indexes, this is the reason why its tricky to call resistance levels in the indexes, thus, its better to keep a real time monitoring. After having said this, this does not mean that the 950 level will be violated to the upside, in fact, this level will prove to be a battleground resistance level. A break above this level which occurs with a certain percentage degree of safety with volatility continuing to fall as it happened all along last week as well as today, we could well see the S&P500 head to 1100 as some analyst have pointed out today.
However, and despite the fact that we are just 4 points away from reaching the 950 level, we are starting to see important signs of an inminent volatility turnaround, one of the most obvious signs besides support levels is that both the VIX, VXN and QQV were up today as well as a very obvious double bottoming formation that could be in the works. And we all know what that means for the stock market.
Well, volatility ended last week in the red while markets rallied after 4 straight weeks of losses.
There is something which we did not anticipate and which might be about to occur; if we take into consideration today's drop of the VXO (the rest of the volatility indexes have edged up), the S&P500 futures contract has closed at the 946 level. If you have been following this blog for the last couple of weeks, we have used the phrase: "there is no going back to the 950 level at least in the short term", well we are just four points of reaching that level. What this proves again and again is the little relevance that resistance and support levels in the stock indexes have when you are using volatility as your major tool for forecasting, especially as is the case when you are trying to catch a market top. Said with different words, usually in an uptrend which we have had since March, volatility drops lead to higher gains in the indexes, this is the reason why its tricky to call resistance levels in the indexes, thus, its better to keep a real time monitoring. After having said this, this does not mean that the 950 level will be violated to the upside, in fact, this level will prove to be a battleground resistance level. A break above this level which occurs with a certain percentage degree of safety with volatility continuing to fall as it happened all along last week as well as today, we could well see the S&P500 head to 1100 as some analyst have pointed out today.
However, and despite the fact that we are just 4 points away from reaching the 950 level, we are starting to see important signs of an inminent volatility turnaround, one of the most obvious signs besides support levels is that both the VIX, VXN and QQV were up today as well as a very obvious double bottoming formation that could be in the works. And we all know what that means for the stock market.
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