|Have you noticed how market volatility has greatly calmed since multi-year extreme spikes last September? Price action has rallied greatly from recent lows and the VIX has shed more than 30 index points, a greater amount than it usually measures!|
|That is true right now as we see the VIX sinking lower towards its 20 level, perhaps reaching it soon. Of what significance is this? Only four times in the past two years combined have we reached this extreme measure of market complacency.|
|Figure 1: Weekly Charts: VIX/OEX|
|Graphic provided by: Quote.com.|
|Graphic provided by: QCharts.|
|Buy & hold traders have one major, vital sentiment tool to watch right now: the VIX right near its 22 level. That is not a trade signal just yet, but should it fall to 20 (or better yet below) one needs to exit all bullish plays or at the very least protect them from downside risk.|
Figure 2: Weekly Charts: NDX & VIX
In its history that I've researched, a VIX reading of 20 or lower followed by a rise in its price marks significant market tops for ALL major indexes including the NDX, Dow and S&Ps. Nothing we truly love more than buy & hold "sure thing" trades. Using broad-market index put options long or selling call options and iShares short whenever the VIX touches or breaches that magical 20 level has been money in the bank every time we've seen it the past several years.
These calm periods in market volatility do not come around very often, but they do suggest the next extreme will be increased volatility ahead. That takes a catalyst to spark the action and history proves downside direction is by far the highest-odds bet when it arrives!
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