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Volatility Index Settles Into a Channel

 April 10, 2008 01:59 AM

The VIX (Volatility Index) has now formed clear and distinct channels from which to assess current conditions.

I found drawing trendlines on this chart to be difficult, and you may have your own method for drawing a trend channel, so be aware of this when looking at this chart.

Right now, the VIX seems to be contained within 32 to the upside and 23 to the downside. If this is correct, then the VIX has either broken slightly to the downside of the channel, or is set to reverse back to the upside.

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Keep in mind that the VIX is said to measure ‘fear' in the marketplace, as it measures the implied volatility of index options (specifically the S&P 500). Higher VIX prices correlate with lower prices in the index, but more specifically large volatility (often downside) moves.

What this means is, IF the VIX is testing the bottom of its trend channel, and IF the VIX reverses to the upside after testing this level, THEN we would expect to see higher volatility and (potentially) sharply lower US Index prices.

Keep in mind that the Markets have bounced up against resistance and are forming a potential consolidation triangle, meaning a large volatility move is not out of the realm of possibilities.

I recommend studying and learning more about this important index and what it might mean for the broader market.

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