SPX has an expected move of about 119 points as we kick off the month of February. The first half of January were pretty quiet, with tame expected and realized moves. IV was mostly subdued until the latter half of the month. The past few weeks, we have seen both IV and realized volatility expand. There have been breaches of expected moves, but the market has still managed to come back and close mostly unchanged.

January had a weird theme to it. It looks like February is going to open with some elevated volatility. There have been some wicked moves in metals and now crypto, and I expect some of that to bleed into equities.

The upper end of the expected move is at 7058, a decent bit higher than the current all-time highs. The lower end of the expected move is at 6819, which is close to the lows of the month from January. 6790 was the low we saw in January. The area between 6790-6820 is the critical support zone to the downside.

As I had mentioned on Friday, I think the two long lower wicks from Thursday & Friday are actually bearish. The fact that Friday did not see upside follow through has me believing that the low on Thursday is not the short term low. It seems like the market has some unfinished business to the downside.

There is a good chance that these lows are retested early in the week, or perhaps even new lows are printed. If that is the case, I do think that a decent bounce will follow.

The lower end of the expected move is most likely a buy if we tag it before Wednesday.

VIX was on a steady climb throughout January despite SPX pushing to new all-time highs. I have spoken about this many times now, but a rising VIX along with a rising SPX is bearish. The probability of a sharp drawdown exponentially increases when we see correlation between SPX and VIX.

Generally, it is SPX who gives in first. I don’t think volatility will just quietly disappear without doing some damage first. The current signs point to a sharp 3-5% correction in the very near future.

The signal at the end of last week was neutral-bearish, with a fear that the volatility from precious metals would bleed into the equity market. Over the weekend, we saw this bleed into the crypto market. I think at this point it’s almost inevitable that we see it hit the stock market.

For that reason, I think the start of the week is signaling bearish. We have not had a clear bearish sign for quite some time, and while the charts are still looking neutral, I think negative sentiment and fear is starting to build up and there are certainly cracks in the foundation. It is only a matter of time until downside momentum and downside price action catch up to the collective psychology.

If you are bullish, size accordingly and beware the volatility to the downside. At the end of the day, buy the dip will win, but you have to make sure you’re still in the game when that time comes.

Let’s hope February continues where January left off, with good volatility and great two-sided action. It’s a great market to trade in!

Good luck!