Monday, June 20, 2011

Chart of the Day: VIX Reversal

The chart that caught my eye today was that of the Volatility Index (VIX). This is the indicator that is often referred to as the "fear gauge" in the market.

This morning, the VIX started out higher, but it quickly reversed and continued to move lower on the day. This bearish action of opening higher than yesterday's high, and closing below yesterday's low is known as an "outside day" (as the high and the low are outside yesterday's range).

If this were a stock putting in that type of action, I would say that it is mostly likely going lower in the near-term. So if we apply the same diagnosis to the VIX, we should conclude that it is positioned to move lower in the near-term.

Traders know that a VIX that is moving lower is often associated with the equity markets moving higher. So a move under 20 in this indicator could be a sign that the near-term spike in volatility is set to take a breather, and that could give this market a little more room on the upside.


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