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S&P 500 technical analysis for March: volatility is continuing to rise

By David Becker

Implied volatility is currently approaching the levels seen during the 2008 financial crisis

“Henny Penny, the sky is falling”. Investors who are long in US stocks might be feeling that there might be no end to the decline in the large-cap US equity benchmark. Stocks are poised to open the second week of March down 5 per cent, after attempting during the first week of March to rally only to fail. This follows a stronger than expected US payroll report that showed that prior to the arrival of the coronavirus on US shores, the jobs data was strong.

Job growth in the world’s largest economy was significant when measured up to February 12, 2020. This is the survey data that was reflected in the February jobs report. The Labor Department reported that the US economy added 273,000 new jobs during the month, while the unemployment rate was 3.5 per cent, matching a 50-year low. The January and February gains tied for best month since May 2018. Expectations had been for payroll growth of 175,000 and a 3.5 per cent jobless level. Average hourly earnings grew by 3 per cent over the past year, in line with estimates, while the average workweek, nudged up to 34.4 hours. All of this data is in the rear-view mirror as traders now focus on jobless claims as a way to measure the March jobs data.

Volatility surges

The implied volatility on the S&P 500 index, which is measured by the VIX volatility index, hit a fresh 11-year high above 55 per cent. The next level of target resistance on the VIX is seen near the 2008 highs near 96 per cent. The current level is very elevated and historically reflects extreme fear, but with the coronavirus yet to spread throughout the United States, picking a bottom is very risky.

In fact, those who want to use options to pick a bottom will find that the very elevated levels of implied volatility make this endeavour difficult. The Fed eased interest rates in early March and was on the tape on March 9 saying they have increased their repo rates and availability to banks to make sure that lending requirements are available to all banks that need capital.

S and P 500 index technical analysis

The S&P 500 index futures have broken down through trend line support and are heading for the 200-week moving average at 2,640. Additional support is seen near an upward sloping trend line that comes in near 2,520. Resistance is seen near an upward sloping trend line that comes in near 2,950. Short-term prices are oversold, with the fast-stochastic printing a reading of 18, below the oversold trigger level of 20 which could foreshadow a correction. The relative strength index (RSI) is fast approaching the oversold trigger level of 30, currently printing an RSI level of 33. The week MACD (moving average convergence divergence) histogram is printing in the red with a declining trajectory which points to lower prices.

S and P 500 index forecast for this month: bottom line

The key takeaway is that volatility is continuing to rise and there has yet to be a shock to the system that hits credit. Implied volatility is currently at levels that are above where they were during the US “dot com” bubble and are approaching the levels seen during the 2008 financial crisis.

FURTHER READING: Should I invest in index funds?

FURTHER READING: S&P 500 technical analysis for March 9 to 13: index could plummet to 2730 this week

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