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Over the past several months I have observed that the VIX is building a base at its lows. More recently, it has been brought to my attention that the VIX may be forming a saucer formation or a “rounding bottom.” See the chart below.
According to John Murphy’s Technical Analysis of the Futures Markets, “...saucers, or rounding patterns, are relatively infrequent. The reason the bottom pattern has been emphasized here is due to my own experience that, when these patterns do make their appearance, it’s usually at market bottoms.” (Page 130) There is some debate about exactly when a saucer has given its bullish signal. One possibility given in the text is that a bullish signal is given when the “platform” that defines the bulk of the action in the lower part of the saucer is penetrated to the upside. It seems to me that another more aggressive signal might occur when a trendline defining the declining top of the activity is overcome and support is found above it, a bullish signal may also be surmised. In either observation, a line is drawn in the sand for us to take action. One further note. Trading activity may make a sudden spurt in the midpoint of the saucer, then die down while the platform is being formed. Look for another spurt of activity in the MACD histogram as the index breaks out of either the platform or the trendline. According to John Murphy, “The amount of time that the saucer pattern has been forming is also significant. The longer it takes to complete the rounding process, the greater the potential for the subsequent move.” (Page 130) This saucer formation has been in the making for at least a year. A breakout should signal a major change in trend. Good investing!
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