Fear Hits Target

About a week ago, we let you know about a bullish breakout in the Volatility Index (VIX) from a downward wedge formation. As anticipated, VIX continued its breakout and has hit our target. In addition, we pointed out that:

At minimum, we’ll see a retest of previous highs in the S&P 500. If those previous highs are taken out, a false move will be in play and we could see a rapid downward move in the market.

As expected, the breakout in volatility coincided with weakness in US markets, including the S&P 500, which is down 3% in 5 days and has broken down through previous highs.

VIX Target Hit

click to enlarge

We indicated back in February that in regards to the S&P500, we would be long above 2088.48, short below it. Investors could have taken advantage of this situation by shorting the S&P 500 using an ETF such as SH and/or (we like doing both) going long VIX using ETFs such as TVIX and UVXY (both up 20% since the breakout). At this point, when you look at the chart above, the S&P 500 is right at the edge of our shaded resistance and up against a 61.8% Fibonacci retracement (in purple). In addition, VIX is up near several points of resistance (not shown), including the upper edge of a downward channel and at 38.2% retracement. Accordingly, we’re closing our long VIX trade and watching the S&P 500 price action closely. We expect the S&P 500 to bounce a bit here and we’d reestablish a long S&P 500 position if/when new highs are made with a close above 2117 on the index. On the other hand, if VIX breaks up from the downward channel, we’ll consider jumping back into the VIX long trade.

No matter the trade, we’ll let price be our guide.

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Disclaimer: nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. Simply put, you are an adult. You invest based on your own decisions. 🙂