Saturday, December 3, 2011

Volatility index tests 200-day moving average, and more: chart views

The financial markets are poised at an intersection now which is important to realize, to avoid being on the wrong side. It's visible in the volatility index ($VIX or just VIX), right when the $SPX is testing 1257 and both it and the Dow Industrials are testing from just under their 200-day moving averages again; crude oil is testing the $101 to $103 range, and gold is testing its own prior-high resistance. We'll look at the VIX. The daily chart at right shows it's once again testing support at its 200-day moving average. The indicators reflect this juncture, suggesting perhaps VIX could go either way this time. And if it rises, then exceeds 37.50, it could move up quickly.

Below are weekly and monthly charts of the VIX. Interestingly, it's testing support from its 50-dma on the weekly and monthly as well. While other indicators look cautionary. Look at the weekly chart again - it could be interpreted as a reverse (bullish) head-and-shoulders. Meaning that, theoretically, VIX could retest and exceed the "neckline". The recent low on the weekly chart might have been a backtest of the broken downtrendline The monthly chart indicators also look concerning; like the StochRSI testing back to its midline. Notice that VIX moved higher this year than its spike last year, though the stock market didn't poke a lower low. This might be a negative divergence on these monthly charts.

I'm no expert in Terry Laundry's T Theory, so I'm just venturing an hypothesis that the VIX will push toward a new high either around autumn 2013, or in early 2014. I'm basing that on the CCI indicator, measuring the time from its overbought condition to its higher low earlier this year - a three-year time which might point to early 2014 for another significant high. But again, this isn't a rigorous application, merely a suggestion.

What is rigorously important is to watch which way the VIX moves from this juncture, and trade with it - not against it. And be aware that we may even see a "head fake" move as the first reaction, before the VIX makes its real move away from the 200-dma.

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