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The charts, graphs and comments in my Trading Blog represent my technical analysis and observations of a variety of world markets...
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Thursday, October 09, 2014

Volatility on SPX:VIX Ratio Pair at Critical Level

I last wrote about the SPX:VIX ratio in my post of August 15th. I mentioned that failure to hold above the 150.00 level would likely see a prior gap up filled, while a break and hold below the 110.00 level would likely see a larger-scale correction begin in equities.

Since that date, price on this ratio finally fell below 150.00 on September 22nd (after re-testing that level and rallying on a dead-cat bounce), as shown on the 20-Year Daily chart below, and closed today (Thursday) just above the 100.00 level (filling the gap in the process). This increase in volatility is not surprising after this ratio pair put in a massive outside bearish engulfing candle on the Monthly timeframe, as I had noted in my post of July 31st.

This 100.00 level sits at a 50% Fibonacci retracement level, taken from the lows (on this ratio pair) in 2008 to the all-time highs set in July of this year. We may see some further volatile swings around (or on either side of) the 100.00 to 110.00 levels for awhile until price either resumes its downtrend, or reverses and rallies. Since the Momentum indicator did not make a new low after today's plunge, we could see a bit of a bounce in equities before it becomes clearer as to which direction equity traders will favour.

Failure to hold the 100.00 level could see a lot of damage done to equities in short order...the bulls will have to begin buying with some heavy volumes to prevent such a scenario from playing out. In any event, volatile intraday swings will likely continue for some time to come...one chart to watch over the coming days/weeks.