Is The Market Ready To Drop? - VIX & SPX Review 8/20/2022

The market tone changed on Friday this week. The primary driver is likely the release of the German Producer Price Index that came in higher than the prior months.

Other factors that have contributed to the change in market tone

Eurozone inflation rate also increased to 8.9% in July from 8.6% in June.
United Kingdom’s inflation rate increased to 10.1% in July from 9.4% in June which was released on Wednesday and the market had a similar reaction to Friday’s by going lower.

Federal Open Market Committee minutes (Fed Minutes) came out on Wednesday and had a positive effect on the market but it was short-lived. It seems the market digested it as “The Fed could increase the rate further”.

Considering the better CPI data fueled the recent rally further last week, any indication that the inflation is lingering around is causing the market to think twice about advancing higher.

VIX Related Indices

The Percentile Rank (PR) of “VIX / VIX Related Index” ratios all remained at the 20% level.

The Percentile Rank (PR) of VIX, VIX3M, and VIX6M jumped back to 30% on Friday.

In case you are interested, here is more information about why it’s a good idea to monitor these VIX indices.

The VIX table for these calculations is now automated and available here.

S&P 500 Technical Analysis

Looks like the market is making more sense now in terms of technical analysis shown in the daily chart below. The rally that took place last week was likely due to short covering and FOMO.

SPX touched the main downtrend line originating from the market top (4,818) that was formed back in January 2022, then turned lower (green line).

The trend is broken for the sharper uptrend line (yellow) and there are some key points that would likely act as major support from here.

The 200-day Moving Average (the wavey blue line)
The large gap (red arrow)
The balance area (white box)
The longer uptrend line (red line)

If SPX breaks through all of these, there might be a good chance it will go pretty close to the 3,785 level as there is a small gap waiting down there.

As I mentioned, historically, S&P 500 has a negative average return in September so would be useful to carry that narrative forward.

My Personal Thinking

Considering how fast the market advanced, the timing seems right for it to go down somewhat.

Especially, considering the next month is September and on average it is the worst performing month for the market.

I will be watching closely VIX and VIX indices and open VIX options positions in the coming days and weeks depending on how large they spike.

Author
Recent Posts

Tony

I have been trading options since 2010 and have been testing and experimenting with various trading styles. Fundamental Analysis based, Technical Analysis based, Trend Following, Day Trading, Swing Trading, etc.

My primary option trading strategies incorporate volatility and I am constantly experimenting with various trading strategies to improve my PNL.

I hold two Master’s degrees (MSc and MBA) with career experience as a cancer research scientist and a digital marketer.