Jim Donnelly, Olson Global Markets

Having reached levels not seen since July 2007, the CBOE Volatility Index (or VIX) appears to be in the process of forming a bottom. For starters, deeply oversold conditions are present on weekly charts. In addition, the VIX is nearing a test of key “cross” trend line support now located at the 15 level. More telling, however, is developing divergence being formed on weekly MACD studies. Such a divergence, if triggered, would suggest that a trend toward higher levels of volatility could follow.

Since there is a well-developed inverse relationship between equity prices and the CBOE Volatility Index, a rise in the VIX would in all likelihood be accompanied by a corresponding decline in stock prices. There is no doubt that earnings on the S&P 500 Index have continued to show improvement. Economic conditions have also shown a series of better-than-expected results. That said, equity prices have rebounded sharply over the past 13 months without much interruption and may have already discounted these events. The key to whether an “interruption”, pause or correction in equity prices actually occurs, however, will likely be signaled by a reversal to the upside in the VIX.

http://www.ogmarkets.com

By Jim Donnelly, Olson Global Markets

Following months of a steady recovery in stock prices, the CBOE Volatility Index (VIX) tested and held two forms of trend line support at the 22.20 level on weekly charts. Oversold conditions are now present on both weekly and longer-term monthly charts, which suggest that a “bottom” in the VIX has likely been reached.

Moreover, since the relationship between the S&P 500 Index and the CBOE Volatility Index (VIX) has been an inverse one, a near-term “top” in the S&P 500 Index may have been reached as well. Thus, weaker equity prices could result if this relationship holds.

Although better-than-expected earnings reports have largely fueled the recovery in the S&P 500 Index, a battle in Congress over healthcare reforms, a call for more troops in Afghanistan and a potential showdown with Iran over its surprise revelation of the development of a second nuclear facility could rattle the equity markets over the intermediate-term.

Weaker than expected readings on both housing and manufacturing also cooled investor enthusiasm for stocks last week. Profit taking in front of this quarter’s end (on Wednesday) as well as the anticipation of Friday’s jobs report could further the tendency to trim positions until clearer reads on both the economy and the geopolitical climate present themselves.

http://www.ogmarkets.com/

by Jim Donnelly, Olson Global Markets

Although spiking higher from last week’s 26.57 low print to close the week at a reading of 32.63, the CBOE Volatility Index (or the VIX) may be headed lower in the weeks ahead.

Clearly, the VIX is already in a deeply oversold condition when looking at week charts. This suggests that a correction higher in the VIX is in order over the short-run. Once such a rebound higher occurs and then begins to languish however, the VIX index appears ultimately aimed for a test of the 24 area where two forms of trend line support converge on weekly charts.

No doubt the relationship between the S&P 500 Index and the VIX has been an inverse one. As the S&P 500 rises, the VIX declines. Thus, a weaker VIX suggests higher equity prices…if, of course, this relationship holds.

Some technicians, however, believe that the decline in the VIX since its 89.53 October 2008 high is already extreme, and suggest its decline is likely over or is nearly so. That would imply that the 910 level on the S&P 500 might be important intermediate-term resistance.

It is worth mentioning on the other hand, that the market often “overshoots” a trend or a correction even if it opposes what the underlying fundamentals suggest.

In this case, an eventual test of the 24 area on the VIX would likely complement an eventual move toward 980-995 on the S&P 500 Index. This is an area on the S&P 500 that we have suggested in the past is where the real battle will likely be fought between equity bulls and equity bears.

http://www.ogmarkets.com