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VIX Breakout Could Signal Further Market Weakness01/24/08 08:44:24 AM
by Kevin Hopson
Even though the VIX is finding resistance around last August's high, the recent pattern breakout could act as a catalyst for higher prices.
|The Chicago Board Options Exchange Volatility Index (VIX) measures investor fear/volatility via options trading for the Standard & Poor's 500. The VIX tends to move in the opposite direction of the S&P 500, which means it can act as a contrarian indicator when volatility reaches extreme levels. Unfortunately for the bulls, the VIX may have higher to go before signaling a bottom in the market.|
|If you look at the six-month chart (Figure 1), you will see that the VIX has broken out of a symmetrical triangle pattern. By taking the base of the triangle (high point - low point ) and adding this figure (37 - 16 = 21) to the breakout point (25), you come up with a potential price target of 46.|
|FIGURE 1: VIX, SIX MONTHS. Note that the VIX has broken out of a symmetrical triangle pattern.|
|Graphic provided by: StockCharts.com.|
|In addition, it appears that the VIX has broken out of a reverse head & shoulders pattern, which formed within the symmetrical triangle. If this pattern is accurate, it would coincide with the price target I mentioned. For example, if you measure the distance from the completion point of the left shoulder (29) to the bottom of the head (16) and then add this number (29 - 16 = 13) to the neckline breakout point (34), you come up with an estimated price target of 47. In other words, the two patterns indicate a target range of 46–47.|
|Since the VIX met resistance around last August's high (as illustrated by the red line), the index could pull back in the near term, possibly to the mid-20s. The reason I say this is because broken resistance tends to act as support and the triangle breakout point (prior resistance) comes into play around 25. If a pullback of this magnitude does occur, it could create an attractive trading opportunity. More specifically, to hedge against another market downturn, traders might consider buying inverse S&P 500 exchange traded funds (ETFs). ProShares, ProFunds, and Rydex are just a few companies who offer these investment vehicles.|
Kevin has been a technical analyst for roughly 10 years now. Previously, Kevin owned his own business and acted as a registered investment advisor, specializing in energy. He was also a freelance oil analyst for Orient Trading Co., a commodity futures trading firm in Japan. Kevin is currently a freelance writer.
|Glen Allen, VA|
|E-mail address: ||firstname.lastname@example.org |
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