Keep an eye on VIX break-out

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I alerted readers to the possibility of a pullback/correction on stock markets a week ago in a post entitled “I’m hedging my stocks by going long volatility”. After edging higher a few more days, U.S. stock markets yesterday witnessed their biggest one-day decline in months, with the benchmark indices experiencing a so-called 90% panic-type down-day and the CBOE Volatility (VIX) Index surging 24.1%. Prior to the opening bell yesterday, the rather timely comments below arrived from Marty Chenard of StockTiming.com.

“Today’s chart shows the daily movement of the VIX versus the S&P 500. The VIX closed at 16.15 yesterday and remains in positive territory.

“However … We have been commenting that “investors should start paying attention to where the VIX is in relationship to fan line number 5 on today’s chart. That resistance line and the support line … indicate that the VIX will come under the “squeeze” of a converging resistance and support line. The result?  A break-out before the final apex is reached.

“The declining lows/highs can’t get much lower and still stay within the descending triangular formation. That suggests, that when the VIX does have its breakout, it will be to the upside and it will be a market negative. So, investors should keep their eyes on this VIX pattern from now until the end of February.” [PduP: Or earlier!]

Source: StockTiming.com, January 28, 2011. [Chart updated by PduP.]

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