18 December 2008


Introduction
The Volatility Index, commonly known as VIX, is a Futures stock index traded in the Chicago Stock Exchange. It is often referred to as the barometer of investors’ confidence in equity market. It indicates the investor sentiment and market volatility. A higher VIX will indicate a lower DOW and vice versa.

What happened to VIX lately?
The attached chart shows that VIX was having very volatile trades lately; it climbed from $20 on 1 Sept 2008 to $80 on 27 October 2008, a hefty $ 60/= or 300% jump, which had never been seen before since 1993 when VIX was first introduced. Then it made a double top formation and plunged 40% to the present level of about $50 through volatile trades.

(Doubleclick for larger view)

What's the use of VIX?
VIX has volatile trades; hence, it is good gauge to judge the movement of the equity markets, which usually have less volatile trades that make future prediction difficult.

Where Can I Get Free Quotes?
One can get free quote of VIX from here and DOW from here.

Where is VIX Heading?
The attached chart shows many weaknesses of VIX; for example:

a) It has just formed a double top formation and is presently declining from its second peak;
b) It's 20 MA (green) is about to cross under the 50 MA(blue), meaning VIX is about to start its decline;
c) The top and bottom Bollinger bands are falling together with falling 20 MA and flattening 50 MA;
d) The stochastic is showing a “falling peak” with VIX dropping steadily into the oversold region. There are still rooms for further declines.

The above weaknesses will show that VIX is presently under heavy selling pressure. One should soon see VIX started to yield once it crosses below the double top support (red) at around $48.

According to rule of thumb, once VIX crosses under the double top support, it will target for $15, which a projection from the base double top support, using equal length measured from the tip of the double top to the base support.

Where would DOW be then?
There is no direct co-relationship between DOW's and VIX’s movement. But if there is any indication at all, DOW will move up when VIX is moving down. However, if the projection of VIX is correct with a target of $15, DOW may be targeting around or max out at 13,000. But to reach that level, DOW would have to break several resistances including the one at 200 MA, which could be a "tough nut to crack" unless DOW is supported by very good news and economy figures.