The VIX measures expected stock market volatility based on S&P 500 options and is often considered the market's fear index. As it reaches extremes, contrarian signals may be triggered.
Above, we have added an RSI to the weekly VIX, with adaptive overbought and oversold levels. During the weeks of 15 Aug 2022 and 28 November 2022, the RSI reached its nadir of two separate oversold signals (green dashed verticals). The SPX500 subsequently pulled back as the index corrected.
The two oversold signals communicated a complacency amongst bulls.
The VIX is flashing a similar signal (green rectangle). Bulls are showing hints of complacency again. This raises the risk that a contrarian movement is imminent, i.e. another SPX500 pullback is a heightened possibility in the near-term.
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.