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Stock Market VIX Breaks Down...Implications...

Stock-Markets / Stock Markets 2010 Oct 12, 2010 - 04:52 AM GMT

By: Jack_Steiman

Stock-Markets

You're not going to love this if you like ACTION. You won't be seeing big swings from day to day when you have a VIX in the teens. It simply means the volatility of the market is basically gone for the short, if not, mid-term. Larger day to day swings are far less likely, thus, you have to find a way to be patient and understand the best way to play this market, which is to simply to find the best base set-ups and wait for them to make their move.


Make sure you're not buying bases that are either at the top, or are flashing overbought oscillators. If you don't have patience in this type of market environment then you'll likely make a lot of emotional decisions. Expecting big market swings, and then not getting them, can lead to a give-up mentality. That isn't usually the best choice, thus, play enough to be involved, but don't over play so much as to let the lower volatility interfere with appropriate decisions. Just understand what it is that's going on and adjust to the moment.

So what suddenly happened here? The VIX broke down badly with a huge gap lower today and ran lower the rest of the day. The close was bad and confirms a breakdown in the volatility. The VIX had at least been trading in the 20's for a while, allowing for some good swings on a daily basis, but now we're dealing with a VIX trading below 20. The gap down was sudden, although the pattern was set up. It was just very hard to imagine a market trading in the teens on the VIX, but here we are. Now we adjust. The breakdown is not one that's likely to reverse back up. The gap breakdown is huge and these types of breakdowns can take months before they set up to move back higher. The chances of the VIX just exploding back up are basically non-existent, aside from the worst case scenario, which I prefer to not even think about unless, sadly, we have to. If the worst doesn't happen, then this set-up says we are likely to have small daily moves for quite some time to come.

The financial's continue to lag. If the market can move towards resistance at Dow 11,200, then they'll likely be dragged higher, but that's about the best you can say. Dragged and not much else. They just aren't leading, and that seems to be somewhat etched in stone as the news out there just isn't favorable. The latest news being that foreclosures need to be put aside for now in order for the banks to try to get more solvent. Tells you just how bad things really are out there on this front. Add in all the other headaches and it's clear that this group will likely continue to lag for quite some time to come.

On the other hand, semiconductors continue to bid well and defy what the masses are saying about them, although we do have Intel Corporation (INTC) earnings coming out tomorrow. This will be huge for this sector. So be prepared for that if you're holding on to those types of plays for now. INTC will move this sector in a big way on Wednesday. The masses are bearish on this stock overall, and maybe for all the right reasons, but we're going to find out how things are going on there in one more day. The market can hang in with one of those two sectors not performing. It won't if both aren't.

Support on any sell-off is at the following levels. We know how strong 1160 is, but we also have gaps at 1141, 1130 and 1113. We also have support at the 50-day exponential moving average at 1120. Tons of support for the bulls not too far from current price. The bulls have not been able to blow through resistance at 1160 with force, thus, I still consider it resistance for now. If we can close above 1171, it would make me feel better about the breakout. We hit the top of the channel today, thus, resistance is resistance until it isn't, therefore, it tells us to keep longs on for now, but not to over do things. Only if we were to lose 1113 would it turn the market from more bullish to bearish.

Just remember that we are now in a lower volatility environment. This means less big swings in the market, however, technical's are still key to everything. Right now it suggests some pullback can occur from near overbought at any time, but that the picture is still fine for now for the bulls. Tomorrow night we get news from Intel Corporation (INTC). That should at least open the door to a drop more movement once they tell us about the state of their economy. JPMorgan Chase & Co. (JPM) on Wednesday will give us more insight to the financial's. Day to day here as always folks.

Peace,

Jack

Jack Steiman is author of SwingTradeOnline.com ( www.swingtradeonline.com ). Former columnist for TheStreet.com, Jack is renowned for calling major shifts in the market, including the market bottom in mid-2002 and the market top in October 2007.

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