Confluence of Resistance: VIX Bounce Coming?

acura

Seeking Alpha's Quick Read - Sun, Jun 28, 2009 by Great Trades

After Tuesday's small NYMO change day signaled a big move day coming, the big move came on Thursday, as the S&P 500 moved sharply off its lower Bollinger Band and powered up toward last week's high. Now, the market is near a key resistance area, and how it reacts to that resistance will likely determine the direction of the next big move.If the S&P 500 can break through the resistance in the area of last week's 927 high, it should make a push toward the 956 high of the week prior. Earlier in this rally, such an up move would have been a given considering next week is month end, quarter end, and a holiday-shortened week. However, there are indications that a market shift is taking place...

Full atical -
After Tuesday's small NYMO change day signaled a big move day coming, the big move came on Thursday, as the S&P 500 moved sharply off its lower Bollinger Band and powered up toward last week's high. Now, the market is near a key resistance area, and how it reacts to that resistance will likely determine the direction of the next big move.

If the S&P 500 can break through the resistance in the area of last week's 927 high, it should make a push toward the 956 high of the week prior. Earlier in this rally, such an up move would have been a given considering next week is month end, quarter end, and a holiday-shortened week. However, there are indications that a market shift is taking place...

Here's a blog post indicating that the VIX closing below the lower Bollinger Band has been a pretty reliable sell signal, and sometimes significant market turning point:

Not only did the VIX close below the lower Bollinger Band Thursday, but it did so Friday as well, with the VIX closing down 1.6% even though the S&P 500 closed down (as you can see from the chart, they normally are inversely correlated). This chart of the VIX and SPX shows this double violation of the lower Bollinger Band, as well as the S&P 500's bounce off the lower Bollinger Band earlier this week:


You can also see in this chart that the 20-day moving average (gold line) sits right at the 927 area, and the PAR SAR Stop and Reverse indicator (little pink boxes above the SPX) will also be in that area early next week. This confluence of resistance means it's important for the market to power through through that 927 area next week in order to have the month-end/quarter-end/holiday rally one would expect. If it fails to break though that area and rolls over instead, a break of this week's low would confirm a head and shoulders topping pattern and would also feature a bearish 13/34 EMA cross (red and blue lines).

Given the current setup, a low-risk, potentially high-reward strategy might be to short any strength in the S&P 500 early next week, and stop and reverse to long on a breakout of the 927 resistance area. That would allow one to profit from whichever way the market breaks.

The double VIX lower Bollinger Band penetration argues for a market break lower, while the "Golden Cross" bullish 50/200 day moving average crossover this week and the quarter-end/holiday week next week argue for a break higher. The key is to be ready for both and profit either way.

acura

Should be "Full Article"

michaelzhang

thx

zjcd

Adds on
Using the VIX as a Predictor---- By Steve Smith

One problem with this thinking is that the VIX isa statistical measure, and it's theresult, not the cause, of any market move. Additionally, because it's a statistic, applying technical or charting analysis typically used on stock, isn't very effective.

But this isn't to say the VIX can't be used as a predictive tool.

Most people tend to use it as a contrary indicator. That is, like most sentiment readings, when it gets relatively high -- an indication of fear or caution --it's taken as a bullish sign. If it's low --which is interpreted as complacency -- it's regarded as bearish.


The problem with this approach is that the VIX not only can stay low for extended periods --it was at decade lows for most of 2006 as the market hit all-time highs -- but it can also rise during bull markets, such as during the tech bubble.

Probably one of the best ways to use the VIX as a predictor would be to use it for short time frames, when it doesn't respond as it should to the underlying market conditions.

But for option traders, the VIX has less appeal as a market predictor than a broad measure of whether options are relatively expensive or cheap, and whether it makes sense to pursue long- or short-premium strategies.

The vega of a position -- that is, the change in value of option resulting from a change in implied volatility -- can often be the difference between a profit or loss, and is sometimes more important than being right about a directional move.

While it's always nice to have the wind of time-decay (that comes with being short premium)at your back, yesterday's move was a reminder of the quick pain that can be delivered.

The Healing Process

During the height of the credit crisis, many market commentators turned to medical analogies to explain what was happening. The situation was often compared to a heart attack, where blood (money) had stopped flowing. By January, it was deemed that the heart was back to pumping, but only feebly; the patient was said to remain in intensive care, still in need of frequent liquidity injections.

The metaphor continues: Even though it will take time and the patient won't be engaging in the high-stress, risky activities he once enjoyed, a full recovery is predicted.

What happened in the option market and the explosion in implied volatility was less a vascular problem than an orthopedic one. When the market suffered a bone-crushing "break," there was associated swelling.

And the broken area is still very tender. Any new bump to the injured area can cause renewed inflammation. The patient (investor) with the memory of the intense pain will flinch, and move to protect himself by purchasing options. I suspect it's this type of behavior that will keep volatility at lofty levels.

While the VIX is still at relatively high levels on a historical basis, I think it fairly reflects the volatility and risk of the current market environment. Over time, it will likely revert back to the historically normal range of the low 20s. But for the next few months, it's likely to stay at inflated levels.

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