Courtesy of John Nyaradi.
“Madame VIX,” the CBOE “fear” index, looks into her crystal ball and sees higher ETF and stock prices ahead.
Fear was in sharp decline this week as stock prices rallied and the bears went into hibernation.
“Madame VIX,” our nickname for the VIX, the CBOE Volatility Index, also known as the “fear” indicator, uses the implied volatility of S&P 500 index options and is an index of the market’s forward looking view of volatility for the next 30 days.
This indicator is widely viewed as a way to measure market risk and forecast future movements. Some observers say that when the VIX is low, market risk is low, and prices are likely to trend higher. This camp also says that when the VIX is high, lower prices are ahead as fear is the dominating force in the market.
Contrarians say to “sell the greed, buy the fear” and so when the VIX is high, contrarians would be anticipating a rally in the indexes, and when it’s low, they would be expecting a reversion to the mean and lower stock prices ahead.
Chart courtesy of www.stockcharts.com
In this chart above of the iPath S&P 500 Short Terms Futures ETN (NYSEARCA:VXX), we see an ETN that is in a sustained downtrend and well below both its 50 day and 200 day moving average. The MACD indicator is in a downwards vector, indicating negative momentum, while RSI is in oversold levels.
Overall technical indicators point to a solid bear market, however, one in which a short term correction could be due based upon the oversold condition of RSI.
Point and figure charting methodology confirms the current action in the iPath S&P 500 Short Term Futures ETN (NYSEARCA:VXX)
Chart courtesy of www.stockcharts.com
This point and figure chart has generated a “double bottom breakdown” which is a “sell” signal and that it has reached its initial downward price objective of $28. Looking at the charts, there is very little support for VXX between here and $21 which were the lows set back in mid-2011, and this lack of support would suggest that it would be a short and easy trip for VXX to decline another 15-25%.
What does VIX mean for stock prices?
chart courtesy of www.stockcharts.com
Bottom line: A quick glance at a chart comparing the S&P 500 (NYSEARCA:SPY) to the iPath Short Term Futures ETN (NYSEARCA:VXX) shows us that, indeed, VIX moves in the opposite direction from the S&P 500. With VIX still in a solid downtrend, “Madame VIX” has looked into her crystal ball and sees lower VIX and correspondingly higher stock and ETF prices ahead.
Go To ETF Home for more articles and analysis of exchange traded funds
Click here to learn more about John’s book and for a free membership to Wall Street Sector Selector
