Monday, November 29, 2010

VIX Study - At least an intermediate stock market top

A VIX stock market study over 3 years (VIX is considered to represent the smart money in the stock market). Remember that only if an uptrend develops in VIX would it be considered a strong "sell" signal for the broad stock market. Similarly a down trending VIX is considered a strong "buy" signal.

The VIX indicator identified the last top in April 2010 (marked with a blue vertical line) and the latest bottom in late May 2010 (marked with a green horizontal line).

Previous tops marked with blue vertical lines. Bottoming area marked with a green horizontal line.

The VIX (Fear Index) Index recently reached levels of complacency and bullishness usually seen at market tops by reaching less than 20 which is normally associated with at least an intermediate top. It also look as VIX is trying to break out of its downtrend line.

VIX definition:
CBOE Volatility Index (VIX) The VIX gauges expected market volatility over the next 30 calendar days by calculating a weighted average of S&P 500 Index (SPX) options with a constant maturity of 30 days to expiration. Extreme high and low VIX readings can provide good contrarian signals, though it actually doesn't matter where the reading lies on an absolute basis if it is at an extreme relative to its recent readings. Buy signals often occur as the VIX reverses lower after an extreme peak, while sell signals occur as the VIX moves higher off an extreme bottom. From The Option Advisor by Bernie Schaeffer

The above is an extract of our latest investment newsletter. See more about the financial markets in our just published ElliottWaveTechnician November 2010 Investment Newsletter.

Geir Solem
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