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.

The fear gauge, or the VIX is showing high complacency and general malaise about bad news.  That's dangerous, but for now the market is sanguine.  As you can see from the chart the indicator is sitting right where it was when the last big rise occurred.  Remember that one?  The SPX dropped 60 points in about three days.  Jobs data is out the remainder of the week, and perhaps the bulls have exhausted themselves for the time being.

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.

With earnings season just kicking off, we have to remember the element of surprise...on the upside and the downside.  The need and desire to be 'right' in your picks and the timing is never so appropriate than now, as stock prices tend to jump either way rather drastically.  While implied volatility rises in front of such events as earnings (then subsequently implode), the low market volatility definitely reduces option prices, keep in mind the market is at yearly highs, and as such some names may already have priced in good performance.  In some cases, perhaps not.  The chart and technicals will tell the story though, and following that lead can help you not to get your hands burned.   INTC had great numbers, flat reaction.  JPM had robust numbers, but again...flat.  Is that going to be the mantra?  I'm not sure, AAPL is coming up shortly and the stock last had killer earnings, but is only up 10% since then. 

I thought a bad jobs report was supposed to punish the markets on Friday?  Every pundit and expert I heard was warning of such an event.  On the way to armageddon, someone forgot that markets have a mind of their own.  You see, all the sage predictions are just a guess, and is really useless as a resource to make money.  I, along with you...listen to what the markets are saying and then act accordingly.  Sure, the media presents a point of view, but it's not necessarily one that should be followed, especially for short term traders.  Our keys?  Momentum, liquidity, trends and technicals...these will tell us how and when to act. 

The VIX...just absolutely crushed recently.  Volatility is cheap and getting cheaper.  What's the deal?  Apparently the market has no fear of 'bad stuff', and on top of that there is going to be a 'chase' for return.  Hedge funds are now desperate to beat their market bogey.  Oh, that could end badly...but who can really make that call correctly?  Heck, you'll go broke continually trying to time such a moment.  So, with a VIX hovering under 20%, is this something to worry about?  Well...it isn't, until it is...if that makes any sense.  Trying to anticipate is foolhardy guessing and sure to be a losing strategy in my book, especially when you're playing options.  Play the trends that are right in front of you, and you can win consistently.

For BigTrends Insiders (click to register), we will be soon releasing our BigTrends 2010 Outlook.  This 25 page PDF report covers everything from the market to volatility to sectors to currencies and more.

Also some specific top picks and pans for 2010 are given in the report, which includes analysis from all the BigTrends Experts, including President/Founder Price Headley, Bob Lang, Moby Waller, Andrew Hart and Scott Downing.

Keep your eyes peeled for the imminent release of this free report!

Last week, I mentioned to our premium subscribers that the VIX was showing unusual behavior.  It was unable to sustain a move above the important 23 level on Thursday and Friday, despite the market selling off.

This lack of any kind of fear spike in the VIX was interesting ... from one perspective, it could be viewed as complacency in the face of market weakness.  However, as I've written previously, there is more and more "smart money" coming into advanced options trading.  This means you dont automatically "fade the crowd" in a contrarian sentiment way, as was the common previous method.  Another obvious factor in the VIX not rising is the common Thanksgiving holiday ... with the market closed Thursday and a half-day on Friday, Market Makers are looking to implode premium a bit.

A test of the key 20 level certainly seems to be in the cards (see the following chart) ... whether we stay above 20 on this week's closing basis will likely be an important sign:

VIX Daily Chart

I get asked often about my platform and what gives me an edge in trading.  I think having an edge is something that puts you at least on a level playing field with the experts, in this case...the marketmaker.  Option traders have difficulty seeing where the size is, who the buyer is and what is important in micro trades.  Certainly having that information is sensitive, but quite valuable to those owning it. 

The CBOE Volatility Index (VIX) is an indicator of option premium pricing that Price, myself and other BigTrends analysts have been following for some time.

It measures the implied volatility of S&P 500 Index (SPX) options, and basically gives an expectation of how much the SPX can move over a 12 month time frame.  So for example, the VIX is around 23 today, indicating that index option traders are pricing in that the SPX could move up OR down 23% over the next 12 months.

The VIX is often studied and used as a sentiment indicator of fear or complacency among traders.  It often is also used in a contrarian fashion.

Taking a look at the VIX Daily Chart below, you can see a clear correlation recently between VIX upward spikes and short-term market bottoms.  Another key factor has been the VIX holding the 23 level on the downside.  We are right around 23 currently.  A confirmed break below 23 would likely be a bullish sign for the markets in my analysis ... while a hovering around here or a move higher would indicate the market will be range-bound with likely a slight downward bias over the short-term.

VIX Daily Chart

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.