The fear index is flashing a warning signal for SPX500

  • SPX500
    (${instrument.percentChange}%)

Intoduction

The SPX500 is up close to 15% since its March low of around 3,800. However, the VIX, which is commonly referred to the fear index may be suggesting caution.

The VIX is derived from the prices of SPX index options with near-term expiration dates. As such it generates a 30-day forward projection of volatility.

Volatility is frequently considered as a means of assessing the prevailing mood in the market, specifically the level of fear felt by those involved in trading. It is often used as a contrarian indicator by technical analysts.

A low reading can suggest too much optimism in the market, whilst a high reading may connote too much pessimism.

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Our recent studies suggest that a VIX RSI reading of 35 or lower tends to signal a level of complacency in the market that is a precursor to a pullback.

VIX Weekly Chart


Source: www.tradingview.com

The top chart shows the VIX with its RSI underneath. The bottom chart is the SPX 500. The blue verticals indicate the times since second half 2022 when the VIX's RSI dipped below 35. Shortly thereafter the SPX500 embarked on corrective market moves.

The current VIX reading is 31.63 (blue rectangle), which could be suggestive of a forthcoming pullback.

The Weekly SPX500 is Overbought


The SPX500 has charted a series of higher troughs followed by higher peaks. This denotes that the index is in an uptrend.However, the current impulse move up may be near or at its apex. There are two reasons for this besides the low VIX reading.

Firstly, the SPX500's RSI is overbought (green rectangle). It is unlikely that the overbought condition can persist for long, and a normalisation is expected.

Secondly, the current candle (blue arrow), which is still to complete, is an inside period. I.e., its range is completely within last week's candle. This suggests that the bulls do not have the fortitude to take prices higher than last week's high. However, the bears, have not quite wrestled control away from the bulls yet either, to take prices down. It is a candle of uncertainty.

Summary

  • The SPX500 is in a bull market, with higher troughs followed by higher peaks.
  • The current impulse up may be near its apex.
  • The VIX is suggesting too much complacency, which is often a precursor to a sell-down.
  • The SPX500 is currently overbought.
  • The index's latest candle is an inside period – a candle of uncertainty.

Russell Shor

Senior Market Specialist

Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.

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