S&P 500 Braces for Volatility Reset and Resistance Levels

On Friday, the S&P 500 experienced a significant decline of more than 2.7%, which came as a surprise to many. However, the change in trend was not entirely unexpected. The key factor to note is that one-day implied volatility, as measured by the VIX 1-Day Index, rose sharply on Friday.

This suggests that the S&P 500 could see a sizable rebound on Monday, at least to start the day, as volatility resets and the VIX 1-Day comes down. The logical resistance levels to watch are around 6,600 and 6,650, as mechanical buying may stall the rally once the VIX 1-Day stabilizes.

The short-volatility metrics, however, matter less, as a rise in the S&P 500 of more than 1% on Monday would also increase realized volatility. This could trigger volatility-control funds to become more active, unwinding some of their short-volatility/long-equity positions. Additionally, CTA flows have likely turned into sellers as the 20-day moving average on the S&P 500 trends lower.

As the earnings season begins on Tuesday with the big banks, the uncertainty surrounding the S&P 500's trajectory remains. Dispersion is still high, correlations are still low, and the spread between index and constituent volatility remains elevated, indicating that further unwind may be required.