The Option Pit VIX Traffic Light Is Yellow: Volatility is likely to move wildly.

The VIX had a strong on move Tuesday, aided by a long weekend running up to 22.87.

It helped the S&P 500 drop 2%, falling 81.75 points and below 4000 to 3997.34.

The VIX is now in partial backwardation:

Partial backwardation meaning the cash is trading at a premium to March futures … but March futures are below April and April below May (and so on).

So what?

The answer: This is always an inflection point.

This can be a spot where the market finds a floor and turns around. We have certainly seen it many times …

However, this move usually does not coincide with a potential clear change in trend:

This area in the yellow circle is a spot where we broke out above the down trendline and into a new high.

Now we have given up that new high and are back below the old one…

The confirmation of that change in trend will be a dip back into the trend line drawn above … which happens to almost exactly coincide with the 200-day moving average.

A break into that zone and the SPX is going to move very quickly lower, down to 3800 or beyond.

I feel pretty strongly that we are going to do it, too.

We have three resistance points within about 25 points of each other: the 50 DMA,  the 200 DMA and the trendline.

One more red day and it is going to be a trip lower.

However, if I am wrong, VIX is going to get smoked and land at 16.

The solution? Buy SPX puts and buy VIX puts.

Questions about that? Leave them in the comments below!

Your Only Option,

Mark Sebastian