VIX declines as equity markets come back into favour

The VIX has been on the slide over the course of the past month, with improving market sentiment helping to lessen the upside seen for this ‘fear gauge.’ That has taken the VIX down towards a crucial area of support that looks to provide a key signal over whether this rebound will be short-term or protracted in nature. Given the fact that the VIX is based on the S&P 500, it is worthwhile taking a look at the correlation between the two. As we can see, by inverting the VIX, the recent move higher in stocks has helped to shift the VIX back towards a crucial historical zone.

Given the downtrend we can see here for the VIX, this latest decline has taken us into trendline support. The uptrend evident over the course of the past year does signal the potential for a turnaround in stocks if the VIX is continue this pattern. However, we have ultimately been trading within a trend of higher lows over the course of the past year, with the latest decline signalling the potential for another turn higher before long. A break below the 22.78 swing-low would bring a potential for a protracted move towards the wider long-term ascending trendline dating back to 2017 lows.

From a daily perspective, we can see that the VIX has started to find its feet after a decline into the 76.4% Fibonacci support level at 25.13. That wider uptrend seen on the weekly chart highlights the potential for a move upwards before long, with a push through the 27.17 bringing a potential bullish reversal signal for the index. The recent move up out of oversold on the stochastic oscillator provides yet another signal that momentum appears to be turning upwards.