Keep Your Eye on the VIX

There is a good chance the market volatility index will move back below a key level -- a positive sign for stocks

By Paul Cherney

The VIX (market volatility index) has started to move lower, and my interpretation of the daily chart pattern suggests that there is a good chance it will move back below its 10-day exponential moving average in Monday's session. As of Friday's close, the 10-day moving average of the VIX finished near 38.64, So on Monday, a VIX move below 38.64 should coincide with a stronger market.

Looking once again at the study about the short-term downside risk after a VIX move below its 10-day exponential moving average, historically the low closes for the S&P 500 are usually seen in the third or fourth trade day after the event. The signal was Tuesday, Sept. 10, and the S&P 500 satisfied the average downside risk of a loss of 2.4% and odds favor a positive bias for prices. Based on historical pricing models in the aftermath of a VIX cross below its 10-day exponential, as of the close on Tuesday, Sept. 24, the S&P 500 should have a close near 936.

The upcoming week brings the September Triple Witch, when the monthly stock and index option expirations coincide with the quarterly expiration of futures contracts. This does have the potential to add some volatility, but the historical odds favor a positive bias unless something more dramatic occurs technically.

The current market is a complex situation both technically and psychologically. I think in the short-run the downside risk appears limited versus the potential reward of higher prices sometime in the next 7 trade days.

Support: Immediate support for the S&P 500 is 890-875. Substantial support is 876-833, with a focus of support 868-854.

Immediate support for the Nasdaq is 1280-1265.

Resistance: Immediate intraday resistance for the S&P 500 is 892-898, then 909-928, with a focus at 923-928.

Immediate resistance for the Nasdaq is 1288-1298, then 1319-1350.92, with a focus at 1346-1350.92.

Cherney is chief market analyst for Standard & Poor's

Before it's here, it's on the Bloomberg Terminal.