[Internals, Daily] Market Direction for This Week
A subscriber sent us this link to Larry Connors' column from July 31:
"Yesterday we looked at the fact that periods of low volatility are followed by high volatility and that periods of high volatility are followed by periods of low volatility. Obviously, we are in a a tight trading range (low volatility) that will likely lead to a substantial breakout one way or another. Which direction that breakout will take is never perfectly known, but let's look at some historical statistics to guide us. And, in my opinion, the best indicator to help get us to an opinion is the VIX."
"Through today, the VIX has gone 9 consecutive days without making a new 20-day high. This ties the longest streak since the VIX's inception in 1986. The other time this happened, it ended on 9/6/00. After making that 20-day high, the S&P immediately lost 10% of its value over the next month and a half. The third-longest period the VIX went without making a new 20-day high was 72 days ending 8/11/87. This preceded the crash of October 1987 The fourth-longest period was 71 days ending 1/24/03. From there the S&Ps fell almost 7% in the following 3 weeks."
"What does this tell us? That at least looking back, when we've seen such sustained periods of low VIX readings, the market has responded by dropping. Now, I'll be the first to tell you, this absolutely does not mean that is what has to happen again. There are many good solid reasons prices have risen over the past 4 months. But, when you look at things on a historical and statistical basis as I do, it's sending us a strong caution sign and saying that it may be prudent to start locking some profits in. And, if you're very aggressive, the better opportunities for outsized gains, may be to the downside, especially over the short-term."
There you have it. From looking the price, we already knew that the market had been in a sideways congestion since mid-June. From studying $VIX, the CBOE Market Volatility Index, we can also divine the same thing, and even make baseball statistics out of it.
We can see that the Bollinger Band has been in a very narrow range since the end of May. This also confirms that the $VIX has been very lacking in volatility. And we know that after a long period of congestion, eventually there will be a breakout.
Last Friday saw a leap in $VIX to the upper edge of the Bollinger Band. By itself, it's not a big deal since it's been up here a bunch of times, but it is significant when we view it as part of overall price action on the $SPX S&P 500 Index. Last Thursday's attempt to break to the upside of the triangle was shut down at the 1000 level, and was followed by downside action on Friday. IF there is a continuation of downside action today, THEN I think this might be the beginning of the real move. On the fundamental front, rising rates might mean that some money is going to leave stocks and head to Treasury notes.
There are two immediate downside targets for the $SPX, the July 21 low, followed by the July 1 low. Until it sinks below these two levels, it's still techincally churning in a congestion zone, $VIX nothwithstanding. IF you are a short seller, THEN this week will find you at work on the aggressive side, as the risk may well justify the rewards.
03.08.04 07:39 #