Key Test For The VIX: February 9 Stock Market Preview
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Thursday’s newsletter presented a number of data points suggesting a bounce for markets was likely near, and we saw a big one Friday, with SPX up a cool 2% from Thursday’s close. We’re now at a decisive and important area, yet no clarity as to which side of this lengthy consolidation area will win.
We see SPX just above the key 9-period SMA, the Hull (HMA), and the 15 EMA. The large GEX cluster at 7000 is still present, and potentially represents an upside target- that is, if SPX can overcome the less conspicuous cluster of positive and negative GEX (not as visible on the net GEX setting) at 6950.
Regardless of whether or not we see a positive or negative trend emerge from this choppy action, in the very short term, I wouldn’t be surprised to see another backtest to somewhere between 6837-6900 before continuing higher, but we need to look at other indices before drawing any conclusions.
The change in net GEX was substantial Friday, with a move of almost 1.3B to the positive for SPX, going from -1.17B to 359M.
While SPX has reached the HMA and 9 SMA, QQQ is still shy of reaching those indicators, with the HMA at 615.38 and the 9 SMA at almost 619.
Both of these indicators meet the approximate areas of significant GEX areas, adding to their importance in determining the next move, in my view.
I believe it’s likely that QQQ will at least test that zone, though the averages are declining, so the ultimate test may be closer to 615 as opposed to 620.
Nevertheless, GEX indicates that conquering 620 will increase the odds of higher targets coming into play. Until proven otherwise, we believe we need to respect the downtrend in QQQ which is more pronounced than what we see in SPX and IWM.
QQQ also saw a sharp increase in net GEX, though still sitting in negative territory as of Friday’s close.
The VIX was down over 18% Friday, with the VIX closing exactly on the 15 EMA (cute coincidence?).
The magnitude of the drop looks bullish for indices going forward, but the immediate problem is that the close is right along the rising trend we can trace back to December 23. A definitive break of this line and/or a daily close below the middle Keltner at 16.77 would be more convincing that 14-15 is in store again.
Until then, if a bounce in volatility is set to occur, this would be the spot. We haven’t seen the positive GEX cluster at 25 hit yet, with Thursday’s high being just over 23.
There is a bullish scenario where a bounce in the VIX stops at 21, so let’s look more closely.
The 4-hour chart presents a scenario where the VIX retests the HMA between 20.50-21, then rejects, at least this is what bulls would want to see as a sign of lower highs on the VIX and potential continuation to lower levels for the VIX.
A 4-hour close above the HMA certainly opens the door to VIX 25, so we need to keep in mind the possibilities if we see the VIX approach 21. The alternative is the VIX gets killed instantly, which I guess is possible. But is that too easy?
IWM certainly looks bullish, in fact, I am far more interested in trying new longs with the small caps instead of the heavy-looking tech names, outside of a few individual setups. But even for IWM to continue higher, we may need to see 260 retested yet again, and 250 is still a major GEX cluster below. 250 may come into play if we see 258-260 lost on a daily basis.
To summarize a few key potential pathways this week:
QQQ appears likely to test the declining MAs between 615-620. This probably means SPX has a shot at 6950. It’s yet to be seen whether this will happen (and reverse) overnight or in the cash session.
With the VIX at key support, even a momentary drop for the VIX may resolve higher for now, though a VIX rise to 21 could be a potential reversal area.
Scenario 1: VIX rejects at 21, SPX holds a retest no deeper than 6837, and QQQ holds 600, reversing and ultimately reaching new highs.
Scenario 2: VIX exceeds 21 and heads for 25, SPX drops toward 6750-6800, QQQ 580-590, and IWM 250.
Scenario 3: Indices gap up as the VIX gets crushed again, heading toward 15 while SPX reaches 7000 and QQQ surges past 620.
We’ll be able to narrow down the likely path as we see how tomorrow’s 0 DTE picture shapes up in the first 30 minutes of trading, and we’ll be discussing the setups in Discord.
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