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Think back to a year ago when the sub-prime problems just began making headlines in earnest and a cry for Fed action was being heard from different market participants. SPY (S&P 500 SPDR) closed August 2007 at $147.59 after six weeks of turbulence. Since that time volatility, as measured by the S&P 500 Index (VIX), has continued to move away from an historic low base that was created from late 2006 to early 2007.

All charts that appear in this article are weekly charts. Since each uses closing information from Wednesday, Friday’s closing data is still required for the last bar or line value.

Figure 1 displays a weekly line chart for the VIX along with the S&P 500 Cash index and a 50-week exponential moving average [EMA]. The window below the chart includes a Relative Strength Comparison [RSC] of VIX/SPX with the rising line suggesting “outperformance” of the VIX to the SPX. Since trendline analysis can be applied to RSC ratios, an upward trending line was added to help detect a potential change in the relationship between the two.

The strong negative correlation between the VIX and SPX is seen as a peak in one index that corresponds to a trough in the other. Using the March 2007 SPX trough as a starting point, a 12 week cycle is added to the chart (vertical, blue dashed lines). Although this cycle doesn’t coincide with every SPX trough or VIX peak, it does seem to capture quite a few of them over the last 18-months.

The 50-week EMA appears to serve as support or resistance for the VIX and the index is currently moving upward towards potential resistance from this objective trendline. What does this all suggest about SPX values going forward? Unfortunately, technical analysis can’t provide you with future price guarantees, but it can help you identify where the weight of the evidence currently lies and what to assess as we move into September.

Figure 1: Weekly VIX with SP-500 Cash Overlay, 50-Week EMA and Relative Strength Comparison
click here for larger view

As the days and weeks progress, traders may want to monitor VIX action as it approaches the 50-week EMA. Since volume and momentum tools don’t apply to the index, consider monitoring instead:

1. The level of the next RSC peak relative to the preceding peak if RSC continues upward or
2. A potential trendline break if RSC moves downward.

A break in the RSC trendline may provide an early alert to traders for a trend shift in the SP-500 Cash Index.

SPY Views

Figure 2 provides a weekly bar chart for SPY with the following indicator and tools:

1. Trend: Long-term upward trending regression channel, short-term downward trending regression channel, a downward sloping dashed trendline, the 10-week & 40-week EMA, and 14-week DMI.
2. Momentum: 12-26-9 MACD
3. Cycle: 17-week cycle initiated approximately 4 years ago

That seems like quite a bit in the way of trend analysis. Although both the intermediate and long-term trends are downward [EMAs], it’s surprising to note DMI remained below 30 during the entire move and may be flattening.

A trendline was added within the channel since less data was used when creating it. Generally the inability of price to reach the upper channel line can be considered a sign of weakness; however, this allows for a shortfall in price that may be more consistent with a channel drawn from different start and end dates.

MACD has recently turned bullish with a signal line cross as of last Friday’s close. In addition, the most recent price low was accompanied by a higher MACD low than the previous MACD low (indicator divergence). Since SPY is moving downward towards the middle regression line, it will be important to note where price and MACD close the week. A continued bullish cross for MACD may favor support at the trendline, while MACD weakness may alert the trader to continued downward price movement for SPY below the middle channel line.

Figure 2: Weekly SPY Chart with Trend, Momentum and Cycle Indicators
click here for larger view

Similar to the 12-week cycle used in the VIX chart, the 17-week cycle captures many, but not all of the SPY price troughs that occurred in the last four years. In some cases the cycle date was inverted and included a price peak as in late 2005, while other lows were missed. This is the nature of cycles. If the pattern repeats, another cycle low may occur near mid-November 2008. Keep in mind this doesn’t mean price will necessarily continue downward; a cycle low can occur within an upward trend.

Rounding Out the Analysis with RSI

Figures 3 & 4 add Andrew Cardwell’s RSI Range Rules to monitor current conditions for SPY and the Dow Jones Industrial Average Cash Index [DJ-Cash], respectively. For more information on RSI Range Rules, see the information at the bottom of this article along with the 7/10/2008 Analytical Toolbox article, “Cardwell Techniques with RSI.”

Figure 3: Weekly SPY Chart with RSI Bullish and Bearish Ranges
click here for larger view

The SPY chart includes the previously displayed regression channels and EMAs, but uses the Relative Strength Index [RSI] as the momentum tool. The regression channel is drawn from a price peak that corresponds with an RSI peak at approximately 60. Per Cardwell, this represents the upper portion of a bearish range for RSI.

While the indicator currently remains above 40—the support area for a bullish range—the two most recent peaks failed to make it to 60. This favors a continued bearish outlook for SPY, but traders must always monitor conditions for potential changes. In addition, if the week closes out with strong positive moves in SPY, the latest RSI peak may end higher.

Figure 4 is provided without comments so the trader can make their own observations about current conditions for the index. Consider the state of the objective trends displayed, as well as RSI movement over the entire term of the chart.

Figure 4: Weekly DJ-Cash Index Chart with RSI Bullish and Bearish Ranges
click here for larger view

It seems whenever I write the Market Outlook piece conditions are challenging. It is certainly the nature of the beast. By completing the process though, I’m focused on “what is” versus what I want to see. If these articles are helpful to you, consider completing a similar commentary over the weekend when you have the weekly closing data. The articles appear on the last Thursday of each month.

To access other articles written by Clare White, please click here.


Clare White
Contributing Writer and Options Strategist
Optionetics.com ~ Your Options Education Site
Questions for Clare? Visit the Optionetics.com Discussion Board 

Cardwell’s RSI Range Rule Basics

Cardwell’s RSI Range Rules identify two regions for the RSI indicator to travel given market conditions. These include:

1. When bullish conditions are in place the indicator will typically travel from 40 to 80 and
2. When bearish conditions are in place the indicator will typically travel from 20 to 60.

RSI in a transitioning market may move between 40 and 60 before establishing its new range.

Clare White looks at the current market conditions by looking back to a year ago, when the sub-prime problems just began making headlines in earnest. 

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