Volatility indexes can be very powerful as they have predictive value. Stated differently, we use volatility indexes as leading indicators in our methodology. One of the 6 volatility indexes we continuously track suggests that the short term pullback in markets may have run its course and a short term bounce might start next week.
On July 16th, exactly at a point when the bull run in markets started, we wrote this in the public domain: Volatility Indexes Sending A Bullish Signal To Stock Market Investors:
Remember, in terms of leading indicators, as explained in great detail in How To Forecast, the growth stock volatility index starting showing a topping pattern, already several weeks ago. Last week marked “the start of a breakdown of epic proportions” is what we reported, and on Friday July 15th we got a confirmation of this.
The growth stock volatility index confirmed a breakdown which makes us convinced that growth stocks are about to outperform markets. It also sends a bullish signal to all other markets and indexes. It is a must-see chart which is available in the restricted area (premium Trade Alerts research).
The timing was very accurate. The bull run between mid July and mid August is history, and an expected pullback is what we got in the last 2 to 3 weeks.
What’s next, is the question that is top of mind of investors.
Based on the current setup of the short term volatility index featured below we would argue that a short term bounce is underway. The pullback has likely run its course.
We said in our mid-August updates in our research that the breakdown retest of volatility indexes was to be expected, it happened exactly as laid out. When volatility indexes successfully re-test a breakdown and move lower again, it triggers a bounce in markets. We believe that’s what we’ll see in the next few weeks.
Invalidation: volatility indexes moving seriously higher and SPX closing for 3 consecutive days below 3896, a very precise level from our algorithm from our Trade Alerts research.
Sign up to our Trade Alerts premium service and receive (a) the daily ‘Algo Alert’ featuring highly accurate support / resistance / trend change levels in the S&P 500 (also SPXL + SPXS ETFs) (b) weekend analysis featuring 6 volatility indexes (c) access to auto-trading SPXL/SPXS or SPY options.