3 early warnings signs of a market reversal

In our 20 years plus of option trading and educating investors, there are certain factors that we've seen time and again can help foretell when the market is on the verge of a trend momentum switch.

Beyond our innovative technical analysis indicators, we also utilize sentiment and volatility based measures that can often give us the "early warning" that something may be amiss in the markets.

The first of these is the CBOE Volatility Index (VIX), which I've been analyzing and utilizing since the early 1990s. The VIX measures in the implied volatility of S&P 500 Index (SPX) options -- this is a factor that is basically human-controlled and has swings based on supply and demand for options. To a large measure, it measures the "fear factor" in the market among option traders.

In recent years, VIX movements higher have tended to indicate that something is not quite right in the stock market and that large-scale selling may be imminent. For example, take a look at the following chart of the VIX and SPX from earlier this year:

In the above chart, you can see that the VIX (green) moved above its Top Bollinger Band (aqua bands) in April, before the market topped out. There was even another early warning about a week earlier where the VIX breached its Top Band but closed below it! Another bigger seismic move in the VIX followed at the beginning of May. The result: the stock market (SPX in yellow) dropped nearly 20% in the two months following this VIX move!