Powell's Speech, The Market Starts Dropping - VIX & SPX Review 8/26/2022

It truly is interesting to see how the market reacts to events. On Friday 8/26/2022, the message from Federal Reserve Chairman Jerome Powell’s speech at the annual economic policy conference in Jackson Hole, Wyo was pretty clear. The Fed will continue to fight surging inflation even if it means causing further economic slowdown.

The market actually started surging during the second half of the talk (image below), then for a minute it even went positive for the day, then it started declining. The 1-minute chart below shows that mini spike right after the speech (red arrow).

This is yet another interesting observation that the market just does whatever it wants. The message was clearly Hawkish, yet the market surged for a few minutes for some reason.

Looking at both the VIX and SPX technical analysis indicates the market will likely to decline further.

VIX Related Indices

The Percentile Rank (PR) of “VIX / VIX Related Index” ratios all spiked significantly except VIX9D:VIX ratio, which remained below 50%.

The Percentile Rank (PR) of VIX, VIX9D, VIX3M, and VIX6M jumped to 50% – 60% range.

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.

The VIX term structure is still in contango so the market drop so far has not caused the front month to spike higher than the future month.

S&P 500 Technical Analysis

The drop that took place on Monday 8/22 created a large gap above (red arrow). The fact that it is not getting filled right away indicates the market is bearish.

The large drop on Friday penetrated 50MA and 25MA, along with the downtrend line that started way back in mid-June (red trendline).

One of the most common questions that people ask is what study, or indicator to use when there is no obvious support or resistance.

Fibonacci retracement levels is a useful tool to predict where the market might land in the coming days and weeks. In this case, it is drawn from the recent top (4,321) to the recent bottom (3,638).

The Friday drop ended at around the 61.8% Fibonacci retracement level. The next stop would likely be 50% which is around 3,979.

The gap located at around 3,800 (red arrow) is also where the 28.6% Fibonacci retracement level is.

People say technical analysis is useless but it is fascinating to see how these key points are just aligned by themselves magically sometimes.

My Personal Thinking

The large spike in VIX is creating yet another opportunity to initiate VIX options trade.

It will be interesting to see where the market will be on Monday and if there are opportunities to take advantage of the VIX Monday effect.

Now that the Friday drop has taken out many of the major support levels, it would not be surprising to see the market drops down to at least 50% Fibonacci retracement level.

Since September is right around the corner and on average it is the worst performing month for the market, the 28.6% Fibonacci retracement level could also be in play. It is also where the gap formed back in July is located.

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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.