The good, the bad, and the "uh oh" - what today's VIX decline portends

Good news! - the the S&P 500 started well this morning, moving above the 922 level that was initially important to help prove that it wasn't a wave 2 up, and even exceeded yesterday's high. In fact, an alert reader pointed out that the P&F chart for the SPX turned bullish on a "double top breakout" yesterday, with a target to 1015.

Bad news, at least so far - the SPX is stalling and hasn't pushed up to the 935 pivot level that Tony Caldaro has mentioned. Farther above that would be the 946 that Andre Gratian has (independently) mentioned as an important level to watch. Even worse, the .618 retrace that would be the level of a rise if the entire move up from last week is only one Elliott Wave 2, was actually at 930.49 and after reacting around that level the SPX needs to avoid rolling over. (The .707 retrace which is a bit higher, mentioned in my weekend work cited yesterday, can also be a common, higher wave 2 level).

What's the "uh oh"? It's that the VIX has dropped and almost exactly touched my 24.78 level that's a Fibonacci .786 retracement to the February 2007 lows! Intraday so far it reached 24.80 and that could actually be enough.

Point is, we need to be alert on all time frames from a reaction in the VIX, especially if it does actually touch 24.78. (By the way, the VIX already reached its own P&F target at 33 according to the Stockcharts.com default P&F.)

It is true that the VIX can react and move higher, while equities move higher, sooner or later. In fact that certainly happened during 2007, when indices made higher highs in October while VIX made a higher low in October than it had notched in February.

But given the state of the markets, it seems a good idea to look not only for a rise in the VIX, and associated cost of volatility and risk .... but also to chalk this up as another potential negative for equities' ability to continue the rally.

(Besides - there were some interesting volatility events between February and October, in 2007!)

*Update AH - if VIX has put in its low, reasonable swing targets upward include: 34.65, 38.70 and 42.10 (based on Fibonacci retracements using the 53 level to be reasonably conservative). Obviously higher levels possible but I think it's better to look for conservative and realistic targets closer by - I also don't want to prejudge the EW count, and running the projections to higher levels would assume we are in a very deep wave C down mode. If that proves to be the case we'll get signals from the EW and indicators and can adjust.

**Note Bill Luby's post today, Timing of VIX Bottom (7/1/09) at his Vix and More blogspot.