Tuesday, September 20, 2011

VIX at support sounds warning for stock markets

The volatility index ($VIX) chart support nearly leaps off the page right now, so here's a look. First on the daily chart below, see how there's a pennant or flag formation as it's been range-bound above 30 for weeks. Stalling out, biding time as its 50-day moving average has been rising. That's very often a classic base-building prelude to another leg up. Its StochRSI indicator (upper window on this daily chart I've set up at Stockcharts.com) is not quite coming off oversold but getting close - assuming it comes over .20 it'll contribute to a preliminary buy )for VIX = sell for stock indices).

From a pure chart reading, if the VIX broke under 30, it could make a run for 22. So we'll allow for that possibility. Interesting thing, if that happened and the stock indices made new highs (a la Apple), it would look like negative divergence because of VIX not making lower lows. Hey, it already looks like negative divergence, when you look at the VIX levels on the longer-term basis.... For that matter, it's possible the VIX could be working on a bullish (fox VIX) reverse head-and-shoulders formation. Hmmm .... Well anyway, we'll see if it pushes upward from the chart support of the flag range and 50-dma.

My weekly chart at bottom also shows that VIX has back-tested a rising trendline it broke above. The trendline angle's a bit off, since I drew it weeks ago, but still valid, and definitely back-tested. Guess what, that's another form of chart support, suggesting VIX is more likely than not to move upward again. And notice, the StochRSI on the weekly is testing its midline, which often signals - either back up again, or lose the support. Of course, if VIX broke support to drop lower, it could test that lower support around 22, for a lower "right shoulder" and then retest upper trendlines; we'll check that out if it happens.

These forms of support, along with the chart indicators, warn that the VIX is more likely than not to move upward and possibly make another set of relatively new highs. No guarantees of course - but the warning puts a cloud over the stock market's prospects now.

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