Fear and Greed Index Nears Oversold Levels, S&P 500, Dow Jones

The CNN Fear and Greed index is not far from reaching oversold levels, and start indicating that it is time to turn bullish on the S&P 500.

The CNN Fear and Greed index is a special indicator that takes seven popular individual gauges into account to provide a view if the market is fearful or greedy. When the indicator reaches extreme values, it is time to pay attention to it, as coupled with classic technical analysis it has in the past helped to suggest extreme pessimism in the markets. My own studies show that it is less good at predicting major tops in the index.

One of the sub-indicators that make up the CNN Fear and Greed index, is the relationship between the VIX and its 50-day moving average. Others are the ratio between put and call options, junk bond demand, and safe-haven demand. Investors tend to watch these indicators individually, but the Fear and Greed indicator looks at all of them to provide one average value.

At the time of writing, the indicator suggested that the market had an “Extreme Fear” with index reading of 23, this is close to the read seen in August when the index dipped below 20 to about 18. That time the S&P 500 bottomed out from the 2773 level and later created a double bottom at the August 26 low of 2808.7.

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Source: CNN.

I suspect that if the S&P 500 would trade close to the August 26 low, but not trade below the August 6 low of 2773, with the Fear and Greed index being around its prior low of about 18, that traders will prefer the risk/reward ratio of the upside. However, if price trades below the August 6 low, then that would shift the control to the bears.Download our latest quarterly market outlook for our longer-term trade ideas.

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