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Using any indicator by itself is exceedingly dangerous. Too many look for
that one indicator which will provide the holy grail of trading - it doesn't
exist folks! One must do a thorough job of collecting and analyzing multiple
clues from the market which requires education, time and patience.
Some perspective on VIX based on history which is not as complete as I would
like: from 92-96 VIX spent virtually its entire life under 20, then
beginning in Jan97 begin ranging between 18-50. During this period values of
30-50 have preceded significant rallies and values of 18-20 have preceded
major declines. In several cases VIX has remained under 20 for several weeks
before any significant decline took place. The use of VIX banding would
allow one to use historical VIX ranges on a mechanical basis at the cost of
lag introduced by the smoothing associated with the bands. In any event,
since I don't use VIX by itself for buy/sell signals, I'm comfortable
marking off the more recent range and coming to the conclusion that VIX is
in sell signal territory.
It's unfortunate that the stacked breadth/vix charts I posted last week
never made it to the list and the list sponsors don't seem to care enough to
respond to my inquiry re size limits. In any event, VIX under 20 appears to
be associated with reversals and declines. However every indicator and
market measure is capable of moving to even more extreme ranges and VIX is
no exception so we need confirmation elsewhere. Price is the ultimate
confirmation and price has not yet broken down! Breadth is another good
confirmation. NYSE breadth has been deteriorating and the daily McClellan
Oscillator is close to giving a sell signal. NASDAQ breadth remains
exceptionally strong. Other breadth indicators which I use are suggesting
that this rally has a good deal of strength and momentum and we are in an
extremely strong seasonal period.
Gerrald Appel developed an interesting concept in his Time Trend III system
of combining trading signals with what he refers to as continuation signals.
When market momentum is exceptionally strong, he uses the continuation
signals to override the trading signals and remain with the trend and
momentum through corrections.
As a position trader, the picture I see is one of strong bullish trend and
momentum, on both daily and weekly charts, which appears to be ready for a
short correction prior to resuming the trend. I see current action as
providing an opportunity to take some profits off the table and any
correction as an opportunity to re-enter the trend. Since I don't make a
habit of standing in front of freight trains, I won't be putting on any
short position trades, although I may use 60 minute charts to put on some
intraday short trades.
Certainly, there are excellent reasons for not buying into this market at
such extreme levels of valuation and I have documented a number of those
reasons previously. Putting that aside for the moment, one should not expect
a major correction here simply because one missed the move and wants a
replay. Everyone who missed the first leg, and wants in on the action, is
waiting to pounce on any correction, so anycorrection here is quite likely
to be shorter and shallower than it "should be" - in EW parlance we are
looking for a W2 correction of 50-62% (of the rally from the October low) on
the daily chart but it may be no more than 25-38%. Those who want in on what
should be a very powerful w3 rally to new highs will be buying on any sign
that a correction is turning rather than waiting for a replay.
If there is one thing to remember it is that the market does not "have" to
do anything. When the market is ready to change direction, the price action
will tell us. All of the other tools we have (breath, sentiment, momentum,
EW, etc.) only serve to give us clues regarding the proximity of a possible
turning point. When those tools give us warning we go on price watch rather
than assuming the turning point has arrived.
Earl
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