Major US equity indices, together with European stock indices, finished last week on the front foot. The Dow Jones Industrial Average has entered a bull-market phase, following a 20% recovery off October troughs, with the S&P 500 not far behind. The Dow crossed above its 200-day simple moving average (32,458) in early November, while the S&P 500 engulfed its 200-day simple moving average (4,044) last week.
Interestingly, though, while the Dow has maintained a bullish vibe since venturing north of the moving average, buyers appear reluctant to commit on the S&P 500 with price dropping back under the dynamic line on Monday. This could have something to do with trendline resistance, extended from the high 4,637, a descending line sheltered just under another trendline resistance, taken from the all-time high forged in early January of this year at 4,818, and neighbouring horizontal resistance from 4,172.
Continued bearish interest throws light on local support from 3,938.
VIX at 20.00 Support
Adding weight to the current technical picture on the S&P 500’s daily chart, the VIX—the Cboe’s Volatility Index—is testing a relatively long-term floor around 20.00 and the lower Bollinger band (set to 2-standard deviations from the mean [20-day simple moving average]). According to the Cboe, the VIX Index is a calculation designed to produce a measure of constant, 30-day expected volatility of the US stock market, derived from real-time, mid-quote prices of S&P 500 Index (SPX) call and put options. A rebound from 20.00, given the inverse relationship the VIX possesses with the S&P 500, supports the possibility of further selling in the stock index.
Why the Inverse Correlation Between the VIX and the S&P 500?
The reasoning behind the inverse correlation stems from options activity in bullish and bearish market phases. A broad sell-off in equities (commonly referred to as risk off) tends to see options traders purchase puts (protective puts) to protect or hedge downside risk in underlying positions, and this results in higher implied volatility. Note that the VIX is represented as an annualised figure with a 68% confidence level (one standard deviation).
The information contained in this material is intended for general advice only. It does not take into account your investment objectives, financial situation or particular needs. FP Markets has made every effort to ensure the accuracy of the information as at the date of publication. FP Markets does not give any warranty or representation as to the material. Examples included in this material are for illustrative purposes only. To the extent permitted by law, FP Markets and its employees shall not be liable for any loss or damage arising in any way (including by way of negligence) from or in connection with any information provided in or omitted from this material. Features of the FP Markets products including applicable fees and charges are outlined in the Product Disclosure Statements available from FP Markets website, www.fpmarkets.com and should be considered before deciding to deal in those products. Derivatives can be risky; losses can exceed your initial payment. FP Markets recommends that you seek independent advice. First Prudential Markets Pty Ltd trading as FP Markets ABN 16 112 600 281, Australian Financial Services License Number 286354.