Thursday, October 20, 2011

Postcards from the edge of a major stock market move: breadth and $VIX

Tonight just a couple of very telling technical charts illustrating the stock market's juncture now. First, the Nasdaq advance-decline chart encompassing 2009 to the present. Shockingly, the $NAAD actually fell early this month below its March 2009 low. If you're a bull you'll call it a double bottom. I call it negative divergence that sounds a warning. We'll let the market prove whether it's going to blast up, or wither down. The volatility index ($VIX) chart at bottom illustrates how the $VIX hit support, then veered up the last several days to test resistance.

Bollinger Bands are a good way to see the support, pivot and resistance levels on these charts. Notice that $NAAD swung from the lower BB to the upper; then stalled. And the daily $VIX simultaneously tumbled to, then bounced from its lower BB, now just under the midline.

These go along with our understanding that the stock markets, probably along with currencies and commodities, are at a critical point. There's not much upside room in stock indices without triggering a breakout. Conversely, there's support (and resistance in $VIX) that'll break if the market chooses the downward path.

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