The market has been on a roll and it’s been a while since I have mentioned the VIX (^VIX, 21.32, up 0.18). Those of you new to the blog, the VIX is the CBOE Market Volatility Index that measures market sentiment. The market appears to be building momentum and when the market goes up, the VIX goes down. The value of the VIX increases when the market heads lower.

If the VIX is below 20 then it means the market is confident which is currently where we are at, basically. The VIX was at 28.54 on July 15 and the S&P 500 stood at 1,214. If the VIX is at 30 or more then it means the market is nervous. The S&P 500 is now at 1280 and the VIX is below trying to get below 20. See the correlation?

Although the VIX is not a tell-all sign on where the market is headed, it can be a helpful tool. Since the mid-July spike, the VIX has been trending lower as the market gains confidence. There are still plenty of headwinds the market faces but the VIX has room to move significantly lower from here which means the market could continue higher.

The Dow was facing resistance at 11,600, and that level was broken yesterday with the Dow closing at 11,615. The volatility is going to continue but bottoms in the VIX have generally occurred near the 16-18 area. The VIX will need to make it below 20 if the rally is going to continue. Otherwise, this could be a bear market bounce that we are riding higher.

I have to give it to the bulls though. After a triple-digit loss to start the session, the Dow in only 8 points away from making it into positive territory as we head to lunch.

Rick Rouse
Rick@OptionsMentoring.com