|
The May 17 gap-down that used to be the resistance has now become the new support for the VIX - see my Sep. 4, 2005 Chartmentary for more details. Technically, this new support appears to be a very sturdy one. The recent breakthrough was not a one-day or a one-month wonder, as it did in May. This was a 5-month endeavor with numerous failed attempts to break above the gap. It finally broke through last week. The rise of the BB (Bollinger Band Width) to the 5-month high and the recent steady uptrend of the ATR (Average True Range) also indicate momentum to sustain the VIX above the current support level. The long-term chart further validates this.
The VIX no longer seems as high on this 3-year weekly chart (Chart 2). It's barely rebounding from the all-time low bottom in July. But it's now trending much higher above the 50-week moving average than in April. The prominence of that 14.50 support is also quite self-evident here. Rather than looking for the VIX to fall back, these recent developments seem to indicate that the VIX is just about ready to embark on a much stronger uptrend. The higher highs and the lower lows formation after the July all-time bottom serve as confirmation of the beginning of such uptrend. This spells trouble for the market. However, the VIX index is merely a measure of the option traders sentiment. We need something more concrete for validation.
The most intriguing technical study is the study of the trading volume because that's where the real action is. And, one of the most intriguing studies of the trading volume is Richard Arms' contrarian TRIN Index (Arms Index). On Chart 3, please take a look at those long black candlesticks in black circles with long upper shadow hovering above 1 (black horizontal line) at the end of April and also the end of August. You usually see a few of those on regular stock charts when the market or the stock is about to top out. But, since the Trin Index is a contrarian indicator, these black candlesticks (along with a group of white candlesticks) are usually seen on the Trin Index chart when the market is about to bottom. And, as it turned out, in the short-term, the market did bottom and began to move higher at the end of April and August. Instead of the black candlesticks, a group of red candlesticks with very long upper shadow developed last week (blue circle). These "inverted hammers" are now paving the way for a Trin Index bullish reversal. A bullish Trin Index that moves up is bearish for the market. The missing long black sticks and the inverted hammer sticks on the Trin Index chart indicate that the recent market decline has not reached the short-term bottom yet. That's not good, but that's not the real bad news for the market. The real bad news is the visible surge of the volatility. The extremely long upper shadow of those inverted hammers in the blue circle, the uptrend of the BB, and the vertical rise of the ATR are all evidences of growing volatility. Another sign of the volatility increase is the disproportionate space above and below 1. The distance below 1 is only 0.5 while it goes all the way up to 13 above 1. This also indicates that the prior "volatility squeeze" is now resolving to the upside, which is bearish for the market. The volatility squeeze occurs when the volatility is "squeezed" to the extremely low level. That's what happened to the Trin Index, prior to its recent up rise. Long-term chart provides a better visual.
On this long-term multi-year daily chart (Chart 4), you can see both the BB and the ATR came from a period of extremely low volatility, during which the volatility of the Trin Index was squeezed real tight. This is also evident in the way the Trin was hugging the thick blue horizontal line at 1. The range of the Trin movement stayed quite narrow around 1 until recently although most of the recent action appears to be taking place above 1. That squeeze had to be resolved eventually, and it's now resolving to the upside. The Trin Index to the upside means, of course, downside for the market. What's even more troublesome is that as much as the ATR and the BB have already gone up on the short-term chart (revisit Chart 1), the long-term chart shows that they're only in the very beginning of an uptrend. You can see how high the volatility rose in 2002 and 2003 (blue circles) before the market truly bottomed out. And as tall as the upper shadow of the inverted hammer sticks appear on the short-term chart, they aren't any taller than those in 2002 when the NYSE was on its way to shed 2,700 point.
Both the VIX and the Trin indexes leave little doubt in my mind that rather than looking at the recent market decline as a bottoming process, it may be in fact just the beginning of a major topping process. And, it's got a very long way to fall...
CONTACT
INFORMATION The opinions of FSU contributors do not necessarily reflect those of Financial Sense. |
