Earlier in the week, Steven Tyler sang to us about living on the edge as the S&P 500 and Volatility Index were on the edge of significant price levels. The S&P 500 had made an ascending triangle and was pressing against the top. A break would be bullish and possibly the beginning of a new leg higher in the market. The Volatility Index was falling back after a spike higher August 24 -- on the edge of a move into normal levels.
This, of course, was happening as the the Federal Reserve Open Market Committee (FOMC) was meeting to discuss the latest direction for interest rates. What happened? Well even my 8-year old daughter could have predicted that the limits of the patterns would hold until the FOMC statement at 2pm Thursday.
At that point, the S&P 500 bolted higher. Peaking over the edge of the triangle. With a spike up to 202.89 it was firmly above the triangle. But the retreat was almost as fast. Coming back down…..right to that triangle again. Often times breakouts are retested and then the price moves back higher in the direction of the break out.
This may happen with the S&P 500 as well. Time will tell. With the ETF SPDR S&P 500 (NYSE:SPY) going ex-dividend Friday and large open interest in the options at the 200 strike above, it is set up for at least a small move higher. But for now it looks like a failed opportunity to reverse.
The Volatility Index had a similar set of days. The long trend lower, bleeding off volatility, was just leaving the elevated range into the FOMC meeting. And on the statement, it spiked lower, well into the normal range.
But that also did not last long as the VIX moved back into the space between normal and elevated. It also printed a Long legged or Spinning Top doji candlestick, which signals indecision, and often a reversal of trend. Indecision in the area between normal and elevated. Ugh.
Both key views of the market took a look over the edge into the eyes of the bull. And both retreated. Does this mean a second leg down in the market? No. Or, well it might, but this is not a deciding measure. But it also throws a wet rag on the bullish case.
For now it is time to watch for a continuation lower or retest and reversal higher in the S&P 500, along with a complimentary and confirming move, either up or down, by the VIX before taking big action. Maybe Friday will bring this, or perhaps we wait through the Quadruple Witching until Monday.
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