This week I appeared with David Keller on Stockcharts Final Bar. We discussed how the market is at a precipice. And no doubt, the words I wrote on April 20th Daily “Now That “Stagflation” Has Gone Mainstream” some five months later are buzzing in my head:

My prediction: SPY, QQQ, and DIA continue to rally until IWM cannot clear $200-then everything sells off again.

That is precisely what happened.

Looking at the Volatility chart and our plug-ins which include 6-month calendar ranges, momentum, and leadership indicators, we can now ask … Was that the sell-off this past week, or are tougher times just getting started?

I do not use the “precipice” word lightly.

Cash VIX rallied right to the horizontal green line or July 6-month calendar range last Thursday, then backed off Friday but traded within the range of Thursday (inside day).

Note that the same type of move happened on August 17, 18, and 21.

In fact, VIX took out the calendar range high and failed to hold above there once it was obvious that the 200-daily moving average above, another green line, could not clear.

Hence, the sell-off and rally in equities until September 15th when VIX broke but then quickly reversed above the July calendar range low (red line).

VIX is now outperforming the SPY.

And the momentum in our Real Motion indicator shows us a mean reversion sell signal in VIX ending this week.

Precipice?

Now we must ask ourselves as September ends, whether the market can bounce back leaving VIX in the dust.

“The last nine times the S&P was lower in both August and September saw Q4 close higher (back to 1981). Higher 9 for 9 and up 9.1% on average.” Ryan Detrick.

Can we make it 10 for 10?

Let’s ask Granddad Russell 2000 and Granny Retail.

The Russell 2000 (IWM) trades below everything: the July calendar range low, the moving averages, the SPY, and sits on the Bollinger Band in real motion momentum. IWM sits there as in mean reversion or more weakness coming?

The best we can say is that IWM is holding above May and June lows. It also has not filled the gap it left when it gaped higher on June 2.

However, note the January six-month calendar range low held up in June. Not so much right now.

Then there is Granny Retail (XRT).

We have written a lot about this sector’s underperformance.

Now, similarly to IWM, XRT trades below everything: the July calendar range low, the moving averages, the SPY, and sits on the Bollinger Band in real motion momentum. XRT sits there as in mean reversion or more weakness coming?

Nonetheless, Granny is weaker than Gramps. The gap that IWM is holding from its gap up June 2, has been filled this past Thursday and Friday in XRT.

Bottom Line

A move over 18.00 or the 200-DMA in VIX, coupled with more downside pressure in IWM and XRT (watch momentum), could spell another leg lower-perhaps to 170 in IWM and 57 in XRT.

Then, we look at the monthly charts and our 80-month moving averages on both, which have held since the heart of COVID.

And, to Ryan Detricks’ point, should we see that mean reversion in XRT and IWM, plus watch VIX to fail 15.00-16.00, then we could get a bounce at least, if not more.

Precipice: a very steepside of a cliff or a mountain. Parachute anyone?

This is for educational purposes only. Trading comes with risk.

For more detailed trading information about our blended models, tools and trader education courses, contact Rob Quinn, our Chief Strategy Consultant, to learn more.

If you find it difficult to execute the MarketGauge strategies or would like to explore how we can do it for you, please email Ben Scheibe at Benny@MGAMLLC.com.

“I grew my money tree and so can you!” – Mish Schneider

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Follow Mish on Twitter @marketminute for stock picks and more. Follow Mish on Instagram (mishschneider) for daily morning videos. To see updated media clips, click here.

Mish in the Media

Preparing for the Next Move in Equities and Commodities in this video with Benzinga’s team.

Mish talks about the Head and Shoulders Top Pattern for the S&P 500 in The Final Bar.

Mish Covers sectors from the Economic Family, oil, and risk in this Yahoo! Finance video.

Coming Up:

September 29 Live Coaching

October 2 Schwab The Watch List 

October 4 Jim Puplava Financial Sense

October 5 Yahoo Finance

October 12 Dale Pinkert F.A.C.E.

October 26 Schwab at the NYSE

October 27 Live in Studio with Charles Payne Fox

October 29-31 The Money Show

Weekly: Business First AM, CMC Markets

ETF Summary

S&P 500 (SPY) 440 now pivotal 430 supportRussell 2000 (IWM) 180 now pivotal 170 hugeDow (DIA) 347 pivotal 340 supportNasdaq (QQQ) 363 now key pivotal resistanceRegional banks (KRE) 39.80 the July calendar range lowSemiconductors (SMH) 133 the 200 DMA with 147 pivotal resistanceTransportation (IYT) Landed right on the 200-DMA which now must holdBiotechnology (IBB) Broke 124 so now watching 120Retail (XRT) 57 key support

Mish Schneider

MarketGauge.com

Director of Trading Research and Education