S&P and VIX Charts: Fear is Not Contagious

Monday's market action gave us a very interesting look at fear and risk appetite as worries about European contagion were absorbed and processed. I was watching S&P 1,140 as important near-term support and thought a break of it would spell an eventual crack of 1,100.

But what I missed was the nature of the selling. It was a slow grind lower, not a cascade of fear on eurozone woes. The market was telling us "it ain't so bad." Here's a look at a high-probability triple-bottom just above 1,135.

If the market should come back here anytime in the next few weeks, I would be a seller. Why? Because I've never seen a quadruple bottom you could bank on.

As always, I look at the chart to tell me what the market thinks about the fundamentals. What is the big money doing? Where is it positioning? What drives it to protection and what turns it around on opportunity?

The market is still in a digesting phase. We've priced in a probable recession that we don't know is really coming. And with the price damage that's been done, time is needed to sort out the true fundamentals from the speculative worries.

Another good window right now on this cycle of despair and hope is the VIX. Take a look at how fear has not made higher highs in this potential bottoming process.

Have we seen the bottom for certain? Of course it's not certain. I would say there's still a coin-flip chance we crack 1,100 on a fear-driven move. That will be a nice capitulation day to buy though on any spike to 1,050 or lower.

The fact the market is building such a strong base here above 1,120 is both encouraging and potentially threatening.

The more we hang out here and flirt with this line in the sand, the more devastating will be the plunge as lots of money managers who are thinking like me will capitulate in fear. The sell stops are palpable.

But for now, you go with the show of strength and high-probability support the market is giving you. I am long Suncor (SU - Analyst Report), CVR Energy (CVI - Snapshot Report), Westport Innovations (WPRT - Snapshot Report), Southern Copper (SCCO - Snapshot Report), Basic Energy Services (BAS - Snapshot Report), and ProShares UltraPro S&P 500 3X Bullish ETF (UPRO). Let's see what happens.

Kevin Cook is a Senior Stock Strategist for Zacks.com.

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