We’ve seen a bit of a ‘relief rally’ in the markets in recent days as the situation in Japan appears to have somewhat stabilized. Now in the latest development of what has been a wild few months, we have somewhat multi-national agreement to take military action against Libya’s despot.
The question for investors is, is it safe to bank on a continued short-term bounce higher in the markets or is risk again rising for another impending pullback? I’m seeing indications that the latter is the case and caution should be warranted against going overly-bullish here.
We discussed this exact current situation this week in our internal trader’s meeting with Price Headley and all the BigTrends analysts. One of the main areas of technical importance currently is the 50 mid-level on Daily Percent R on the S&P 500 Index (SPX) (SPY). While we look for extremes in this indicator, quite often the mid-level becomes important in a choppy type of market. You can see in the first chart below that the 50 Percent R level on the SPYders has been important both as support and resistance over the past month. Monday’s action brought us right back up towards the mid-area, and a failure here is likely to bring lower short-term market prices in our analysis. Also note that the SPY has potential resistance from Exponential Moving Averages just above current levels and around the key 130 level — equivalent to the round psychologically-important 1,300 level on the SPX.
SPY Daily Chart
The market whippiness over the past month has coincided with a pop in the CBOE Volatility Index (VIX) (VXX) (VXZ) that began Feb 22nd. Now if you remember back, Feb 22nd was after the Egypt problems had already been relatively settled, and was even a bit after the Libyan protests began … but was certainly before the Japan earthquakes. Bottom line is that this measure of option implied volatility began to spike on that day with a market selloff and since that time the market has been in a downtrending/whippy mode. The VIX has basically imploded quite a bit in recent days after reaching above 30 intra-day last week — however this plunge has brought us back to where we’ve seen previous support and VIX pops (in line with market weakness). Yet another significant juncture for the market lines up near here … and at this point we wouldn’t forecast a move in the VIX below the 18/18.5 area before another spike occurs.
VIX Daily Chart
Bottom short-term perspective here is that risk for the long (bull) side of trading appears to be growing — and we may be right at the point of reversal lower. It’s not confirmed that another sharp downleg is imminent, but I would certainly be cautious entering too many bullish positions here and would look to grab quick downside profits should the market turn lower in the coming days and the VIX move back higher.
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