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Volatility Index update for August 19, 1997: When trading OEX options as
psuedo futures contracts it helps to maintain a skeptical attitude and a
contrary perspective. The reason being is that most OEX retail traders get
sucked into the crowd euphoria and buy at the wrong time. What we are
looking for with these volatility indicators is for a reversal in momentum.
The VIX can be used as an "applause meter" that signals the trends and
trend changes in coincidence with price. When looking at price alone it is
hard to know how far overbought and oversold are. By looking at implied
volatility you get an "excitement" reading that can facilitate detecting
the overbought and oversold levels in price. What we have going into
Wednesday is the MVI tagging its moving average from below and the VIX
sitting on its moving average from above, and the OEX tagging its moving
average from below. The McClellan oscillators of issue and volume are
coming off of extreme lows and the OEX trying to breakout above its newly
formed downward sloping regression channel. Now, moving averages often act
as resistance points. Wednesday noon eastern time also acts as a
resistance point in time and price. Taking a look at the VIX Z score we
see that the 5 day is on the edge of neutral and overbought, the 20 day is
on the edge of oversold and neutral. It would not surprise this trader to
see some more upward followthrough into Wednesday and then some profit
taking come in due to the technical resistance later in the day. Late
Wednesday and Thursday might be give back days, and might not. For now the
signals are still on "BUY" from Monday afternoon, but once long, an exit is
being looked for while being taken for a ride on the trend.
BobR
Momentum Cycles
http://www.oextrader.com
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