Using VIX to Find S&P 500 Bottoms

Upward spikes of the CBOE Volatility Index (VIX) usually correspond to significant S&P 500 (SPX) bottoms.  The big question is how large of a VIX upward spike?  The size of a VIX spike varies depending on the nature of the SPX decline.   For the current SPX decline that began on 03/28/24 the Relative Strength Index (RSI) could be helpful.

The daily SPX chart courtesy of Trading View provides the first clue to possibly finding a significant SPX bottom.

From 07/27/23 to 10/27/23 the SPX declined 10.9% and brought the RSI marginally into the oversold zone.   The  SPX decline that began  03/28/24 has as of 04/19/24 has fallen 5.9%.  Yet the RSI is almost at the same level as the October 2023 SPX bottom.  This tells us the current SPX decline has more velocity than the July to October SPX drop.

A case could be made that perhaps the SPX made a significant bottom on 04/19/24.  Two factors argue against this scenario. 

1. The 04/17/24 blog “S&P 500 and Russell 2000 – Important Support Zones”  illustrated potential Volume Profile support in the area of the December to January decline. Price tends to gravitate to Volume Profile support/resistance zones.
2. The 04/20/24 blog “Nasdaq Adds Fuel to the Bearish Fire” noted the large Nasdaq Composite decline made on 04/19/24.   There’s a good chance this event will cause stock fund managers to get defensive, triggering additional near-term selling.

The weekly VIX and SPX chart illustrates their relationship since 2017.

This chart uses the RSI indicator on the VIX index.

Note that the VIX is currently at almost the same level as the SPX October 2023 bottom.  This indicates the current decline is generating more fear relative to the July to October SPX decline.  Also note the RSI is currently slightly higher than its level reached in October 2023.  This is another sign of increased fear.

Its possible the VIX is signaling the SPX bottomed on 04/19/24.  There are two other scenarios that could develop.

1. Sometime there can be a VIX divergence.  Perhaps in the near-term  SPX  goes below its 04/19/24 bottom, but the VIX does not make a higher peak.  This  occurred in June 2022 just prior to a two-month SPX rally.
2. The VIX – RSI moves above 70%.  Since 2018 this has only happened twice.  The first instance was the 2018 mini crash, the second was the 2020 Covid crash.

If the SPX has not already put in a significant bottom, either one of these scenarios could occur.

Momentum and sentiment evidence suggests the SPX could be close – but not yet at a significant bottom.

The next blog will examine Fibonacci price and time relationship indicating where and when the SPX could make an important bottom.