Berk covering for Mole

I am writing for Mole tonight, and I will discuss the $VIX (which I wrote pre-market), as well as the indexes.

As we all know, $VIX is the volatility index for the $SPX.  Essentially, it gauges the fear in the markets.  When the $VIX is high, people are scared, which typically leads to people selling stocks.  When the $VIX is low, complacency sets in, and the world eyes the moon with a stone’s throw.

I took all the data the Prophet.net has on the $VIX and started drawing some conclusions.  The most notable items on the chart, aside from the actual signals, is the 2 major channels drawn.  The red channel, the one I call the bear market range, is where we spent most of our days, chilling out maxing, relaxing all cool and trading some stocks before 2000 came through.  That range is from 19 to 47, and accounts for most of the $VIX price action during the tech bubble.  The purple (lavender) faded channel on the bottom, starting from ’03 is the bull market range.  It basically covers 16 to 11 (11.5), and is the complacency level this decline started from.  I have some additional price lines on this chart, but they are more valid from a daily standpoint.

This is a little more than 1 year, with $SPX compared with the $VIX.  The red dots are sell signals, and the red lines take you to the respective top.  Likewise, the green circles are (confirmed) buy signals, and the green line takes you to the proper bottom.  As you can see, we got a confirmed buy signal on Monday, which could well lead to a big rally.  Normally, in a bear market move, we will see 2-3 failed $VIX buy signals before we actually get a confirmed one.  As it stands right now, with this signal, we must respect the upside potential in the form if a C wave of an expanded flat that is wave 2.

Here is the same chart just using lines to remove some of the noise.  $VIX is in black while $SPX is in blue.  Same idea, follow the lines.

Finally, I would like to discuss what it takes for the $VIX to issue a signal.  The signal is comprised of 3 candles, or daily closes.  A confirmed signal needs the following on the $VIX:

1) A daily close outside the 2.0 BB in either direction (signal alert)
2) A daily close back inside the 2.0 BB from the outside (signal issue)
3) A daily close deeper inside the 2.0 BB (signal confirmation) – (i.e. $VIX closed outside, to the top, on Thursday.  Friday, the $VIX moved back inside with a lower close, issuing the signal.  Monday, the $VIX closed lower than the Friday close (i.e. more towards the center of the BB), confirming the buy signal)

The sell signals the $VIX gives are extremely accurate while the buy signals (confirmed or not) are a little harder to read, and consequently, hold less weight (to me).  Some people have been saying that the $VIX is “broken” but I see no indication of that thought.  So far, the $VIX has been right on cue, and has called a number of the last tops and bottoms.  As I said yesterday, conventional thinking will be unraveled in this move down, and perhaps to predictive value of the $VIX with it.  But I will continue to use this while it is working.

I took those charts earlier today.  Now that the $VIX has closed higher than the signal alert close, we can likely ignore this buy signal.  A close higher in the $VIX tomorrow would confirm that notion.

So, that said, where are we now?  The indexes close down across the board.  FNM was 1 of 42 stocks up on the $SPX today, so breadth has (yet again!!) reversed back to the downside.  This breadth reversal, however, was stronger than the bullish reversal yesterday.  What does this mean?  It means wave 3 is here and in force.  We might bounce up a few more times if the markets want to keep banging out 1-2s, which I wouldn’t mind.

Here are the charts, starting with the $COMPQ because I love relative strength.  I threw out a target of 2205 a few days back, but since the $COMPQ closed on lows, I am thinking we will hit 2155-2135, and even our lower target before this is over.  In case you haven’t noticed, the markets are moving swiftly down, as we laid out.  At this point you should be using the inevitable “snap-back” rallies to get short.  The purple lines are a projected path should we be adding 1-2s like the $SPX is.

Talking about the $SPX, I think we will see 1200 tomorrow.  Most likely for a test, and a strong rally off of that level as the bulls will have their “retest” of the lows.  Since we are oversold and are really pushing down hard, this rally could be quite strong, probably looking for at least 1250, but we will gauge for sure when we get there.

I really hope you all have been enjoying this move as much as Mole and me.  We have laid out some killer names, and we hope you have been grabbing some nice profits with us.  But really, 9 out of 10 stocks are going down, so the choice is yours.

Skål!