Recently, the stock market indexes have exhibited a Bearish Triad pattern. This pattern is comprised of three components: a fall in the S&P 500 index, a fall in the NASDAQ Composite index, and a fall in the Dow Jones Industrial Average (DJIA). This Bearish Triad suggests that the stock market is headed for a decline.
At the same time, market breadth tests have also become a cause for concern. The market breadth test is an important measure of the overall health of the stock market. A negative reading means that there are more stocks falling than rising, indicating bear market conditions.
One particular market breadth test, the VIX (or Volatility Index), has been hovering just above 20. When the VIX reaches this level, it is a sign that the market is approaching an important support level. The support level is essentially the level at which the market has a reasonable chance of bottoming out.
If the stock market continues to decline, it is very likely that the VIX will breach the 20 level. Once it does, there is a high probability of it continuing to move lower. This would signal that the stock market has likely seen its bottom and is heading for a recovery.
The bottom line is that the Bearish Triad and the market breadth tests are an important warning sign for the stock market. If the VIX continues to move lower, then it is likely that the stock market is headed for a rebound. Investors should keep a close eye on this key measure of market health in order to time their trades accordingly.