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S&P 500 update: Watch for resistance at 2490-2515

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Mariam Webster’s definition of Complacency:  marked by self-satisfaction especially when accompanied by unawareness of actual dangers or deficiencies :  marked by complacency :  self-satisfied a complacent smile

The VIX volatility Index measures the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking, is calculated from both calls and puts, and is a widely used measure of market risk, often referred to as the “investor fear gauge.”

A VIX reading above 30 indicates that investors are nervous, fearful, and risk-averse, concerned that the markets will decline. While readings under 20 indicate that investors are complacent, risk-tolerant, and optimistic that the markets will run higher. As we can see on the VIX charts below, investors are more complacent/optimistic today than at almost any other time in history.

Volatility index chart showing market fluctuations and investor sentiment from 1999 to 2017.

Another indicator that we need to pay attention to is that the S&P 500 seldom deviates more than 7% from its 200-day Moving Average. As we can see on the following chart, once the S&P 500 deviates up or down more than 7%, we tend to see a correction the other way. Today the S&P 500 is trading at 6.91% higher than its 200-day MA, suggesting a correction is coming.

S&P0726

In January we noted that once the S&P 500 closed above 2300 that 2500 was the next target. We identified the 2490-2515 range as a Key Resistance level for the S&P 500. With the S&P 500 currently trading just south of 2480, we are getting close to a strong resistance area for the markets. We would expect to see a Near-term high for the S&P 500 in the next few weeks.

We have continued to ride the market’s methodical rise higher, but recently sent subscribers a new pending trade (our entry price has not yet been hit) to profit should the markets decline here.

Numbers to watch:

  • 2490-2515 Near-term high
  • Potential for a quick decline to 2400-2415
  • A breach of 2400, although not expected, opens the door for a further decline to 2300
  • After declining to 2400, look for a new rally through 2500, then 2650
  • Another decline from 2650 to 2500
  • Then a year-end rally to close the year between 2700-2900

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Stay tuned!