Stock Market Volatility Set to Increase This Week – Analysis and Predictions for August 19, 2024
As the week begins, the stock market is expected to see a rise in volatility, especially with options expiring on Wednesday. The current VIX option positions indicate that the VIX may hover around the 15 level, suggesting that the low volatility experienced last week may no longer be a factor.
With the market dropping, the support from put options purchased back in early August is no longer in play, as monthly OPEX is now behind us. If the market sees an increase this week, it will have to do so without the boost from options expiration.
Moreover, 1-month implied correlations have decreased, currently sitting at 10.6, which historically is associated with market tops. This indicator proved useful in identifying the July peak, signaling caution when chasing rallies.
The S&P 500 30-day realized volatility stands at 20.16, while the VIX is at 14.8, creating a gap of +5.36. This disparity, where actual volatility is higher than expected volatility, has historically led to increased volatility and further drawdowns in the S&P 500.
Looking ahead, the Japanese Yen will be in focus this week, with BOJ Governor Ueda speaking before Parliament on August 23. Additionally, the release of the CPI on August 22 is expected to show a 2.7% year-over-year increase.
From a technical standpoint, the S&P 500 has returned to its 20-day moving average and dipped below the 10-day exponential moving average, bringing the key support level back to 146.25. If this support is breached, a retest of lows around 142 could occur.
The index has also reached the 78.6% retracement level of the decline from mid-July, a crucial technical level that could signal a potential reversal or continuation of the trend. Moreover, the index is retesting a trend line formed off the October 2023 low, making Friday’s close a strong resistance level.
In conclusion, this week presents challenges as there are more resistance levels technically. If the market is to pull back, this week offers the best opportunity for a reversal. Paying attention to these indicators and events can help investors navigate potential volatility and market movements effectively.