Fixin' on the VIX: Discussion of where the VIX is fixin' to go

Bill Luby has written another neat article about the VIX, VIX Overview: Guessing Where Volatility Might Plateau from the Macro Cycle Picture (posted 4/24/2009 at SeekingAlpha; you should read his article to get all of his points, of course). Readers here know that's one of my favorite topics (perhaps the most original of my chart analyses that I bring to this blogspot). His chart illustrating his point about periodicity in the VIX on a big-picture basis is below (I put a copyright notice with his name on it so it will be clear that it's his chart). Seems to me that the periodicity he describes in that article is really quote close to the Armstrong Economic Confidence Model dates, something I've also written about in prior posts. (You can find my prior posts using the labels list at right, such as Confidence Model-Armstrong, and VIX.) Here one of his statements in his article: "Note from past volatility spikes that the initial snap back to lower levels of volatility typically last from 4-6 months after peak volatility. If this pattern were to be repeated once again, then I would expect volatility to put in a new bottom in no more than the next 2-3 weeks."

Well, he makes an interesting point. However, the VIX and VXO low we saw last week was 5 months from the VIX/VXO secondary peak with the November 2008 lows, and just a little over 6 months from the VIX/VXO peak in early October. Also, we know as I've posted here rather a bit recently that the VIX's low last week was to the .786 retrace level I've described. (Some of my prior posts include Sentiment, technical indicator, and market charts to watch for equity market direction this upcoming week, April 20-24, 2009 (4/18/2009), VIX's drop into gap fill target has also met long-time Fibonacci retrace level target (4/17/2009), and Hat tip to Martin Armstrong - this one's for you! - Decade-old predictive model still "working" (4/12/2009).)

I'm not really expert in Armstrong's model, and I've noted (a long time ago) that its high and low points don't always correspond exactly with equities markets, but seems to corespond rather well with the VIX (which also doesn't mark exact highs or lows in equities). Even so, the model's highest and lowest points don't always synch up exactly with VIX's highest and lowest points, and there is a sort of plateau effect that Bill talks about in his article. Now, I also have learned that Armstrong refers to "public waves" and "private waves" in his model, but that's all I know - I don't know which ones are which, so I'm just guessing that those may have something to do with the plateau effect Bill Luby marked on his VIX chart.

Below Bill Luby's VIX chart, I'll post how my SPX:VXO chart is looking now. (I won't re-post my VIX/VXO charts yet again, I've been posting them so often already!) Again, as I've been noting, it's fascinating to see that this ratio has headed into its 200-day moving average into this potentially significant time window. (I posted about the time window of March 6-9 including the Fibonacci time aspect, on March 7 here; and only later referred readers to its inclusion in Merriman's list of critical reversal dates in his Forecast 2009 book (page 51). Well, if you own a copy of that book, you might look at page 51 again. ;) ) If you look closely, you can see that the drop on Monday this past week "broke" the parabolic SAR indicator on my SPX:VXO chart, to track bearishly. I don't use parabolic SAR by itself, but it's interesting to keep an eye on sometimes. Check out the StochRSI on that chart too. The whole positioning fell in line with the idea that the markets would have topped out a week ago, although as Merriman noted in his weekly preview yesterday, there's intermarket divergence as to which markets went a bit higher yesterday (like the Nasdaq, that just had to fly like Icharus closer to its 200-day moving average).

We were fortunate, really, to have the ChartsEdge weekly forecast that clued us in to the idea of the equities markets moving up into late Friday. What can I say in conclusion? Well, we don't yet have the ChartsEdge forecast for next week ... plus we have other things to post and consider this weekend ... but if the markets were on thin ice last week, that ice seems to have gotten thinner by now.

*Update - Hmmm, just noticed this article, VIX Update (BS on the Market, 4/20/2009). The author notes a 29-day period under the 20-day moving average, same time period it was under that MA in December-January. That's a very neat point, because in my way of looking at the VIX, there's a very rough way of "counting" an ABC movement in which that prior December-January drop was the A, with a choppy B up, and we'd have completed the C. That time symmetry of the VIX being under its 20-day MA therefore "fits" well.