Technically Speaking: Warning Signs A Correction Is Ahead

After a decent rally from the recent lows, there are multiple warning signs a correction approaches.

Over the last few weeks, we discussed the rising risk of a correction between 5-10%, most likely this summer. Such drawdowns are historically very common within any given year of an ongoing bull market. As Sentiment Trader recently noted, we are now in one of the more extended periods without such an occurrence.

(Click on image to enlarge)

Warning Signs Correction, Technically Speaking: Warning Signs A Correction Is Ahead

Of course, as is always the case, amid a bullish advance, it is easy to become complacent as prices rise.

Before we go any further, it is essential to clarify we are discussing only the potential for a short-term correction. As is often the case, some tend to extrapolate such to mean I am saying a “crash” is coming, and you should be all in cash. Such an extreme move is ill-advised without a significant weight of evidence.

However, there is reason to be cautious in the near term.

Suppressed Volatility

As I stated, during a “bullish advance,” investors become incredibly complacent. That “complacency” leads to excessive speculative risk-taking. We see clear evidence of that activity in various “risk-on” asset classes from Cryptocurrencies, to SPAC’s, to “Meme Stocks.”

A measure of speculative excess is the Volatility Index (VIX). The chart below is from my colleague Jim Colquitt of Armor ETF’s.

The top pane is the 15-day moving average of VIX, which is on an inverted scale. The bottom pane is the S&P 500 index.

(Click on image to enlarge)

Warning Signs Correction, Technically Speaking: Warning Signs A Correction Is Ahead

“The market may have one last push higher over the next several weeks. Such will take the VIX even lower and complete the VIX wedge pattern. That pattern has been evident in the last three 10% or greater corrections. By this measure, the correction should begin somewhere around July 21st – August 10th.” – Jim Colquitt

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Paul McGee 1 week ago Member's comment

Completely agree.