BigTrends

Well here we are again ... the CBOE Volatility Index (VIX) has dropped down to the key 17.5 level, meanwhile the S&P 500 Index (SPX) has rallied again towards the 1,150 area.

Where have we seen this scenario before?  Well, it wasn't very long ago -- in January 2010, we tested these areas (see the following chart).  Last time around, we spent several days waffling around before a fairly big market reversal occurred.  This pushed the VIX from 17.5 all the way to the upper 20s, and the SPX dropped from 1,150 to around 1,050.

So, will history repeat itself this time with a market correction ... or are we going to breakthrough with continued upside in the SPX and decline in the VIX?  I would lean to the latter choice - why do I say this?  Well, first off the second test of key levels is often the point of breakthrough ... the market has shown resilience to push back up to here.  Secondly, we've again cleared a key Fibonacci level that I've discussed before around 1,121.  Additionally, the Daily Percent R on the SPX was over 99 on Friday, which is an extremely strong reading.  Also, there certainly is skepticism in the air ... yet we had one of the better economic reports in some time last week.

While I rely on various systemized signals for our Index Options Timer trades on (SPY) (QQQQ) and (IWM), which can go in either direction at any time, I would anticipate at this point that we will test 15 on the VIX before we again approach 30.

That's right folks, the recent selling pressure has the market average closest to the 200 day MA (exponential) since July.  As it stands now we are about 2% above the key trendline, which rests at $104.79 on the SPY.  At first glance it looks longer-term bearish, however, that's not the case if the market holds above this level of support.  Odds are that this will be a solid level for value seekers to enter the market.

The argument is two-fold, it's trend based and volatility based.  Take a look at both charts below–the S&P500 and CBOE Volatility Index both show that the market has 2-3 percent MORE to lose before finding a short-term bottom.  Of course, if we break below the 200 day for two or three days I'll update the post as it would alter the outlook in a meaningful way.

Click on the images to expand

S&P500 Daily (200 EMA)

CBOE Volatility Index

The CBOE Volatility Index (VIX) moved over 6% higher today, to close at 18.66.  Taking a look at the recent VIX moves, you can see a clear pattern on these daily pops.

The last 3 VIX upward spikes lasted exactly 2 trading days, then the overall downtrend resumed.  Based on this pattern, one would anticipate that the VIX may rise to the 20 area on Thursday, only to reverse lower on Friday.

Something else to keep in mind on the Hourly S&P 500 (SPY) Chart that I follow quite closely for our BigTrends Index Options Timer program.  That chart has formed a whippy range between roughly 113 and 115 ... that range is likely to be broken soon.  If it is broken to the downside (no certainty at this point, most underlying trends are still UP for the markets), then we could see the VIX move beyond 20 , possibly moving to its Top Bands around the 22 area.

It's that time of year again when investors start adjusting the rear-view [investment] mirror as they look forward to a new year of money making trends. It's a good time to peruse the free analysis available, all-the-way from the top investment banks down to your local advisor, but be selective and filter out the noise because a lot can be misleading or incorrect.

That said, I found this handy little document called, Goldman Sachs Global Viewpoint - Top Trade Ideas for 2010, which covers Goldman's (GS) top 8 trade ideas for 2010. In my view, it's well worth the time to scroll through the short 7 page analysis, there are some ideas that I agree with - for example, Trade #2 is LONG RUSSIA Equities (RSX), this points towards the strength in BRIC countries (BTW, Goldman coined that acronym back in 2001), however, I would expect Brazil (EWZ) to be a larger beneficiary of BRIC investments next year. I'll be covering the details of Brazil in BigTrends 2010 Outlook due out next week (sign up for a free BigTrends Insider account to receive)

Tell us what you think about these trade ideas below, I'm especially interested in the 12 month volatility play...

For those of you that follow us on Twitter you saw our new way of sharing the market this morning. If you're looking for the best way to stay in touch with BigTrends look below the video.

In the future we'll be offering more updates on the market via video in our blog, if you have an iPhone you'll be able to view them there too.

In the mean time, check out this analysis on the Market, Gold, and a Real-Time Large Put trade on ARM..

The recent slide in volatility has taken the VIX from a level of 32 down nearly 20, a more than 33% drop.  That follows a rise of 50% from the same area in late October, so we're back to that mark.  Is that a problem?  Unfortunately for the bulls, the answer is YES.  Today it may not be a problem, but the lack of fear is not going to propel much higher prices in the interim without the presence of volatility.  After all, does the market go straight up and give everyone a profit?  Of course not.  The market seems to work best when there is some balance or even a slight 'edge' to the other side.  For the bulls, the 'wall of worry' is what helps prices rise, while the bears exude confidence from the type of complacency we see today.  Again, we are LOOKING for signs, which may appear sooner than you think.  We play the game though until the rules or patterns change.

Might not be a bad thing to buy some volatility here as it's quite cheap.

The CBOE Volatility Index (VIX), which measures the implied volatility of S&P 500 Index (SPX) options, is a good measure of overall market expectations for volatility.  As you may know, we hit record highs in the VIX over the past year, but have come down to the 20 to 30 area over recent months.

However since October we have seen the VIX make a mini-rollercoaster ride from the 30 area down to the 20 area ... then back up again to over 30 this month, and now we are heading back down lower, closing below 25 on Friday.

This recent volatility in the VIX itself has caused the Bollinger Bands on the index to widen considerably.  As you can see in the following chart, the Bollinger Band Width on the VIX has reached its highest amount since January 2009.  Certainly, that was a much more volatile time then now, before the March market bottom.

VIX Daily Chart with Bollinger Band Width


What does this VIX Band expansion mean?  Well, this trend may not have peaked yet, but it does seem to indicate that there may be a large market move in the coming weeks/months (likely before year-end).  What direction will we go?  Well, the underlying trend since March is certainly bullish and liquidity is flowing into the world's markets like Niagara Falls ... but this is actually a big picture retracement rally within a bigger downtrend move.   Additionally, we have run up over 50% since March, so one may presume that the current uptrend is a bit "tired".  So I would lean to the downside, but the more concrete angle is to bank on a big move in either direction, utilizing your best technical analysis to determine what directional trend we are in or enter into.

The CBOE Volatility Index (VIX) has been in a range between 20 and 30 since July of this year.  It keeps coming back to the mid-level of 25, however.  Just this week, we broke above 25 to test the Top Acceleration and Bollinger Bands (see the following chart).  Previous tests of this area were quickly reversed lower, in line with a market rally.

However, based on Friday's intra-day activity thus far, it looks as if we are having another run up in the VIX to its Bands.  This may correlate with a bit longer period of market weakness than many are anticipating.  This is the last trading day of October and looks to be a selling day.  Will the first trading day of November come Monday bring more selling?

The much anticipated jobs data was released Friday and pre-market action is pointing to a decisive sell-off.  Of course, this is based on initial reaction to the number of jobs lost, but you can read the direct release below and make your own assertions. 

You don't normally see economic data and technical data used in tandem, generally, economic indicators are longer-term compared to short-term analysis with technical indicators.  In my view, this morning's negative reaction comes at a good time for buyers.

Most traders will look to short this market next week, based mainly on Thursday's sell-off followed by this morning's negative reaction.  That seems logical, but there are two indicators that are screaming SHORT-TERM BOTTOM.  The VIX and the CBOE Equity Put/Call Ratio.

CBOE VIX


CBOE Equity Put/Call Ratio


empsit

The CBOE Volatiltiy Index (VIX) has remained above the 23 level on a closing basis, despite the recent very strong market (see the following chart).  This is likely due to option buyers banking on an increase in volatility in the normally volatile September/October period.  However, given that thus far this has not been "smart money" -- the market has continued to rise and volatility has continued to come in, I would tend to view the inability of the VIX to drop further as a mildly bullish contrarian indication for the stock market.