Tuesday, January 22, 2008

Brunhilde Day Today?

Today could turn out to be one of those days that imprints the value of the VIX deeply into the psyche of many traders.

While I have gone out of my way to suggest that the markets do not have to see a VIX spike in order to put in a bottom, it appears that following this morning’s surge in the VIX to 37.57 (the highest reading since October 2002) many buyers felt comfortable starting to nibble. Now with the markets inching back toward even for the day, the likelihood of a high volume reversal day signaling a market bottom is increasing dramatically.

While I have done some nibbling of my own, I would not be surprised to see at least one test of the lows of the morning and would hold off on calling a bottom until we see more evidence of higher lows and higher highs.

On the other hand, if today turns out to be a bottom, you can bet that that next time we have a major selloff, traders will be watching the VIX even more intently to determine when it signals that bottom. If the VIX was important before today, it is about to become even more important going forward, when traders eagerly watch to see when Brunhilde is going to sing.

2 comments:

Adam said...

The ISEE index closed at 110 0r so, again diverging from VIX. It put in a low last week, and so again, do the 2 indicators (spike in VIX and a low in ISEE) together indicate we are close to a bottom?

Your thoughts wil be highly appreciated.

Bill Luby said...

Hi Adam,

Regarding a bottom, many bottoms need to survive at least one significant test of support in order to establish themselves as bottoms. I would expect today's bottom to get at least one such test tomorrow. If it holds, then today becomes a provisional short-term bottom. If your time frame is longer than a couple of days, the bottom needs to hold on not just the daily charts, but the weekly charts as well -- and we also need to see things like higher lows, higher highs, and moving averages starting to turn up.

Bottom line: I would not jump to conclusions about today just yet, although the VIX and ISEE do offer some hope to the bulls that a bottom may be in the process of forming.

Cheers,

-Bill

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