The VIX, the 26 Level and a Gap Closed. What Does it Mean?

By: Marty Chenard | Fri, Dec 9, 2011
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FYI ... Last Friday's comments are below for reference, and are followed by today's updated comments below that with the current updated chart. See below for the current VIX number we need to avoid in order to not have trouble on Monday morning.

 


December 2nd. commentary: What becomes more dangerous when it is above 26, and less dangerous when it is below 26?

The answer is the Volatility Index (the VIX) which is often called the the Fear Index.

What some investors may not be aware of, is the importance of 26 on the VIX. It so happens that many Institutional investors initiate what are often referred to as "program trades" when the VIX rises above 26.

What is a program trade? It is a term that describes a situation where baskets of stocks are traded all at the same time, and the event is triggered by the execution of a computer program. Sometimes, these are block trades with a total value of over a million dollars, that are executed on the New York Stock Exchange.

The impact can cause unusual swings in volatility which carries a higher than normal exposure to risk levels for smaller investors.

Since program trades typically increase after a value of 26 on the VIX, then below 26 would be a quieter, safer place to be when trading long positions.

Take a look at the two year chart below, where you can see the correlation between the S&P and the VIX when the VIX was above or below 26. It is not a trader's magical tool, but it can alert an investor when he is in a territory where volatility and whipsawing can be exceptionally high.

This daily chart shows the daily movement of the VIX. The VIX closed at 28.67 (on December 21st.) and it was below the trouble area of 30.16+ ... 28.67 is still best described as a lesser Negative level.

 


December 9th. commentary: Note what happened this past Monday ... the VIX moved down slightly below 26 and then bounced back up again. As we explained last week, 26 is an important program trading level. I drew a vertical line on Monday's tick so you can see what happened after the VIX moved back up on Monday.

So, since Monday, the VIX moved higher until the S&P buckled yesterday.

But, if you look at the chart, something important also happened yesterday. The November 29th. tick had an unfilled gap, and yesterday's up movement filled that gap and then closed lower, but just above the gap's resistance at 30.59.

When gap's are filled, sometimes it has an effect like blowing off some of the steam leaving less pressure. That will likely be the reaction this morning, which would mean a lower VIX. But, it will be what happens this afternoon that will be important. If the VIX moves back up and closes above 30.56 that will spell trouble for the markets on Monday morning.

Chart 1: This week's VIX Chart ...

S&P 500 Index

Chart 2: LAST week's VIX Chart for reference ...

S&P 500 Index

 


 

Marty Chenard

Author: Marty Chenard

Marty Chenard
StockTiming.com
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Tel: 828-296-1200

Marty Chenard is an Advanced Stock Market Technical Analyst that has developed his own proprietary analytical tools and stock market models. As a result, he was out of the market two weeks before the 1987 Crash in the most recent Bear Market he faxed his Members in March 2000 telling them all to SELL. He is an advanced technical analyst and not an investment advisor, nor a securities broker.

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