I find it is prudent to periodically check long-term charts for
confirming or diverging patterns relative to existing market
conditions. With the S&P 500 having recently stalled out @ 1100, I
thought that this would be a good time to reveiw the VIX (market
volatility index).
Of course, the VIX constantly zigs and zags on a short-term basis,
but to really get a sustainable and sizable move in the market, there
needs to be a strong reversal or continuation pattern in its long-term
trend. Today is Monday and I am going to review the monthly and
quarterly charts of our favorite fear gauge in an effort to get a
bettter idea on where we might be headed.
On the monthly chart (see below), the VIX broke down to a new low in
October, but also made a new high and closed above the resistance level
of its September high. This is a key reversal and should not be taken
lightly. Only two days into November, it has already surpassed the
October highs. Meanwhile, the bullish stochastic crossover hints at a
potential reversal from an oversold condition. At present, this is not
the case, but this development should be monitored by following up with
weekly and monthly charts.
VIX Monthly Chart as of 11-02-2009
Next, we have an image of the quarterly chart for the VIX (see chart
below). The last candlestick bar to the right represents the current
quarter, i.e. data for last October and the existing month of November.
Like the monthly chart above, the pattern (in this case, a candlestick
hammer) for this quarter is also displaying signs of an emphatic bottom
while the relative strength relationship between the VIX and S&P
500 appears to be reversing its market direction. Typically, reversal
moves in quarterly timeframes can run for months at a time, so be
vigilant with this timeframe as well.
VIX Quarterly Chart as of 11-02-2009
Charts courtesy of Worden Brothers and FreeStockCharts.com
In summary, monthly and quarterly analysis of the markets are
regarded as very long timeframes and rarely discussed in the financial
media or credited by the majority of investors who subsist on a diet of
daily headlines and soundbites to feed their investment decisions and
market outlooks.
On this level, one needs to think on a scale comparable to
navigating a battleship or Battle Star Galactica. Altering its course
by even only a few subtle degrees might be unnoticeable to the
untrained eye, but over the course of time, one can find that points
along the journey or its final destination to be a completely
unimaginable and unforseen place.
Remember that chance favors those who are most prepared and right
now it might be wise to prepare for an increase in long-term volatility.
