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Monday, January 24, 2011

The VIX Awakens >>> Wall St. Traders Will Feel The Shivers (Sooner Than Later)

The CBOE Volatility (VIX) Index

Having reached a potential support level at last mid April / May 2010's low near 15, and warned that a bounce off that level could cause a stock market pullback. That's because the VIX and stocks usually trend in opposite directions as shown in Chart A.

The reason I'm coming back to the VIX today is because it's climbing 8% and beginning to look like it's short-term trend is turning up.

Chart B shows the VIX action more closely. After bouncing twice off support near 15 since mid-December, the VIX is challenging its early January intra-day high at 18.63. A close overthat initial resistance barrier would turn its short-term trend higher and could signal an overdue pullback in the stock market.

The recent rally in the broader stock market has begun to correct; and it shall likely correct for the next several weeks. We view this decline much in the same manner as the Jan-2010 to early Feb-2010 decline, which the S&P lost roughly 106 points or nearly -10%. Certainly the momentum are turning lower, and now we view the VIX as a confirming indicator that perhaps has higher prices in mind than anyone is prepared for at this juncture. But at this point, we view any decline in stocks as a "cooling-off" period prior to perhaps a higher high in the 2nd quarter.

The weekly chart shows major support at the 16-to-18 zone is holding once again, and has for all practical matters back to mid-2007. This is reasonable, and one could very easily note once the VIX turns higher, then it generally "spikes" higher. If that is the case here, and the probabilities do favor such an outcome - then minor trendline resistance at 19 should be taken out. This would argue for a 200-week exponential moving average mean reversion exercise that would carry prices upwards to 24.56 or even slightly higher. At that point, quite obviously the technical landscape would need to be reassessed, for further gains would put the declining trendline off the 2008-to-2010 highs into play, and we fear what a breakout above this level would mean to stocks and the US economy in general.

The DJIA closed strongly after tagging a new high last Friday.
But do you see any volume to substantiate the prices?
Where is the supporting cast?


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