Before we look at last night chart I would like to reiterate once more that we have traded one of the best bull markets runs in history. There was hardly a time over the last year or so that the stock markets were down more than 2 or 3 days in a row. It seemed like everyday I would log on to Stock Charts in the morning the SPX would always be up 3 to 5 points. It was just a steady move higher with little volatility.

Last Friday that nice gentle uptrend we had grown accustomed to came to an exciting climax. What we are experiencing right now is the beginning of some volatility that is going to take some time to get back under control. Think of dropping a super ball off the top of the Empire State building. First, you get a really big bounce followed by a big decline then another bounce that is less strong with the next bounce getting weaker. At some point, the initial volatility will be reduced back into normal price action.

During those volatile swings we should see some type of consolidation pattern build out that will be unrecognizable in the beginning, but as time passes it will slowly show itself. We know where the top of the new trading range is, but the bottom still needs some confirmation that Tuesday’s low is in fact the low for this next consolidation phase.

Lets start by looking at the 12-year monthly combo chart which has the VIX on top and the SPX on the bottom. When we looked at this chart on Monday night the VIX still hadn’t reached the 43 to 47 area which has shown us in the past where an important low on the SPX was. Tuesday we got the spike into the major buy zone which is strongly suggesting an important low is in place.

That being said a new trading range should develop to consolidate our previous impulse move up similar to what happened in 2011 and 2015. As you can see the VIX spike nailed the low, but there was a lot of chopping action before the next impulse leg up began which is how markets are supposed to work. The spike in the VIX marked the low in 2010, but it still took several months of bouncing along the bottom before the SPX rallied into the 2011 high. Even the 2011 VIX spike took the SPX three months of chopping around the bottom before the next impulse started.