Monday’s essay prompted two common questions from concerned readers… When will it happen? And, how bad could it get?<\/p>\n
The “when” is easy to answer… Soon.<\/p>\n
The VIX has been below its lower Bollinger Band (BB) for two days in a row. It’s rare for the VIX to close below the band for three straight days – though I have seen it happen. And I can only recall one time when the VIX spent four days below its lower BB. I’ve never seen it stay there for five straight days.<\/p>\n
So, unless we’re going to make history, the VIX should generate a sell signal today or tomorrow.<\/p>\n
As for “how bad can it get”… well… let’s look at the chart of the S&P 500…<\/p>\n
<\/a><\/p>\n This chart is tracing out a bearish rising wedge pattern. This happens when a chart makes higher highs and higher lows, but the distance between the highs and lows gets smaller. Most of the time, this pattern breaks to the downside in a quick, sharp move.<\/p>\n The S&P 500 closed yesterday right on the resistance line of the wedge. There is room for the S&P to work slightly higher inside the wedge before reaching the apex – where it will have to break out of the pattern one way or the other. So, the index could chop back and forth for a couple of sessions before we get a larger move. But, we should see a breakout – either up or down – by Friday at the latest.<\/p>\n And since the VIX is on the verge of generating a sell signal, I think the odds favor a move to the downside.<\/p>\n If and when that happens, the first downside target is near 2780. That would be a “healthy,” 3% correction from current levels. While that might shake up some of the recently converted bulls who have chased stock prices higher this week, it wouldn’t do too much damage.<\/p>\n A more significant decline is possible, though.<\/p>\n If the S&P 500 doesn’t hold support in the 2775-2780 area, then the next support level is all the way down near 2700. A decline to that level would be more than a 5% correction. It would wipe out all of the gains from July. And it would shake the confidence of most investors.<\/p>\n For the moment, I think we’re more likely to see a smaller correction play out. Many of the daily technical indicators are overbought. But, they’re not at extreme enough levels to fuel a 5% decline from here.<\/p>\n So, traders who choose to bet on some downside action might look at the 2780 level as a good target for the impending VIX sell signal.<\/p>\n Best regards and good trading,<\/p>\n Jeff Clark<\/p>\n![\"\"](\"https:\/\/jc-stable.s3.amazonaws.com\/ee-assets\/channels\/articles\/mm\/201808-mm\/20180808-MM-01.png\")
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