We have seen the markets take dramatic dips more frequently since the start of the year than we have in a long time. Each big dip has been followed either within days or within weeks by a recovery. So how do we know if this recent dip is the one that pulls the rug out from under the rally?
That cadence of bounces is probably the best tell there is as to what will happen next. Yesterday say a 13% jump in the VIX, the CBOE’s gauge of volatility. The VIX isn’t based on a simple calculation but it is designed to show how wild traders expect the markets to be based on what options they are trading on the S&P. It isn’t really a leading indicator that will predict if a drop is imminent, but it has been a consistent confirmation tool of broad market reversals.
The steady rise in the VIX is and indication that the market is moving into a reversal. While yesterday’s big jump is consistent with the recent trend, a VIX level that stays above 20 will be a pretty reliable confirmation that the reversal will extend. the longer it stays above 20 or keeps rising, the more likely the broader market is to decline.
Keep learning and trade wisely,
John Boyer
Editor
Market Wealth Daily
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