Vix under Siege as S&P 500 Fills January Gap

Metallic Wrecking Ball Shattering The White Wall. 3D Illustration.

The S&P 500 hit its highest level since late-January as the index fills a “bearish gap.”

Remember, gaps are patterns on candle-stick charts that show a security jumping up or down from one price zone to another without any transactions between the two. That leaves a space, or “gap,” on the chart.

One such gap occurred back on January 30 after the S&P 500 stalled at an all-time high. A few days later it crashed, resulting in a huge volatility spike that most traders will likely remember for years.

But that was then and this is now. And right now, the S&P 500 is marching its way back up into that gap, which lies between 2838 and 2851. It briefly probed it back on July 25, but retreated and seemed potentially at risk of pushing lower. But then buyers came out of the woodwork last Thursday, August 2, and sent the index back towards the sky.

The price action seems consistent with two other potentially bullish S&P 500 patterns we’ve been tracking on Market Action. First, it’s held an upward-sloping trend line that’s been in effect for more than two years. Second, the index appears to have formed an ascending triangle by making higher lows since April. And price action since mid-July could represent a breakout from that triangle.

Finally, the melt-up in stocks is also driving volatility lower. Cboe’s VIX “fear index” slid for a third straight session and is headed for its lowest close since January 26.

What’s behind all the bullish sentiment? The first explanation is a strong earnings season. It also appears that some investors who dumped stocks in recent months because of trade worries are now sneaking back into the market.

It’s also worth remembering that we’re in a relatively quiet period as the second half of August approaches. There will be much less news and potentially less trading activity. Can the index break out on low volume?

S&P 500 with price gap, potential triangle.
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David Russell is VP of Market Intelligence at TradeStation Group. Drawing on two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them apprised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.