Wednesday, June 15, 2011

VIX Sell Signal

The VIX broke out today giving its first valid sell signal since February 22.  The body of today's candle was completely outside the 50d x 2sd Bollinger band closing above the previous swing high.  This type of action usually indicates that the selling is heading into its climax phase with approximately 1 to 3 more weeks of selling to go.  To repeat today's earlier conclusion - this rules out the triangle pattern completely and leaves 3 possible outcomes:  1) the market is nearing the end of a flat correction that began in February which will be followed by a resumption of the cyclical bull market, 2) the market is nearing the end of a flat correction that is the first part of a combination correction that will last several more months, or 3) the market is in the early stages of a resumption of the bear market.  It will probably not be possible to confirm the last option until much more time elapses.

At the moment I am beginning to lean more toward option 2, which means traders should be on guard against overtrading and buying into false rallies.  Traders will also have to guard against aggressive shorting that will most likely be difficult as most of the selling pressure may be realized in the next two weeks and then again later in the year for a brief period with choppy action in between.

There really is not much to do at the present time for intermediate term traders except sell weak positions, protect profits and stand aside for better days.

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