Daily TrendWatch
Price Headley is the founder and chief analyst of BigTrends.com, which provides daily stock and options recommendations and education.
May 16, 2012
Navigate the Volatile Waters with Fibonacci, VIX & the Dollar
With the S&P 500 Index (SPX) (SPY) breaking below both its recent range and the March 2012 lows, fear is starting to spread among option traders. We've seen the CBOE Volatility Index (VIX) (VXX) close above 21 for two days in a row. Daily Percent R on the SPX reached an extremely low level of 2.48 this week. Meanwhile Treasury Bonds (TLT) and the Dollar (UUP) are rocketing higher.
So it's definitely an eventful time for option traders right now, and a worrisome time for some perma-bulls. Let's take a look at some key things we're seeing on Fibonacci Retracements, the VIX, and a note about UUP that can help put things into perspective.
First the SPX with long-term Fibonacci Retracement - this is a weekly chart we've been watching since the hugely volatile move from the 2007 market high to the 2009 panic low. Since then, one form of thought is that we've basically been retracing some of the losses.
If you take a look at the first chart below, you can see that we've broken back below the 1361 Fibonacci 76.4% Retracement level. This may now act as resistance on rallies - note how this was a significant level several times in 2011 (and even in 2008).
SPX Weekly Chart
Next we'll zoom into an SPX Daily Chart, focusing on the steady uptrend that was in place from December 2011 until April 2012. This uptrend has broken down and a Fibonacci Retracement of the fairly clear low to high can show some key levels to watch.
Note on the chart below that we held above previously and now have broken the 23.6% retracement level of 1360 (very similar to the 1361 level in the first chart, which gives this technical area more importance in my view). This means that 23.6% of the roughly 264 SPX points we gained from Dec to Apr was given up.
Next is a retracement level at 1321, which we've already begun to approach. Beyond that lies the most important of the retracement levels (and one which is seen time and again in history), the 50% retracement of the gains, which is at SPX 1290. So keep that in mind as a downside target should the recent weakness continue.
SPX Daily Chart
Next we come to the VIX. This measure of option implied volatility has also long been known as a fear indicator. However, in my view it's become more of a "smart money" indicator in recent years, while previous to that it was often contrarian. So when the VIX rises, it's a warning sign quite often.
Note below that the VIX gapped up and had follow through, the gap has not been filled in yet. This is unlike the quick gap above the key 20 level that we had in March that was quickly reversed lower. The most similar range to where we are now is the 20 to 24 range on the VIX that occurred in late-2011/early-2012. Bottom line is the VIX hanging above the 20 area is a poor backdrop for stock gains, in my view.
VIX Daily Chart
Next a quick note about the Dollar ETF (UUP) - this isn't our favorite currency ETF to trade in our ETFTRADR program, we prefer focused currency ones like Euro (FXE) and Yen (FXY). But the UUP daily chart is noteworthy because we had a 100.00 reading on Percent R on last Friday May 11th and also again on Tuesday May 15th. Such a strong reading is unusual to have once, much less twice in a week.
The performance of UUP after such a 1 day 100.00 Percent R reading is mixed (as opposed to previous research we did that showed gains for the SPYders following a 100.00 reading over about 3 weeks). In a quick optimized holding period test of such an extreme UUP Percent R reading, it shows that in 7 of 9 occurrences (77%) since inception in 2007, UUP was higher 23 trading days later. Shorter-term, it's more of a 50/50 type thing but does often precede volatile moves, so expect volatility concerning the Euro v Dollar to continue for the near term.
UUP Daily Chart
We've previously discussed how 2012 has started to look more and more similar to 2011 in terms of broad market performance. Keep this in mind, as well as the key levels and concepts we've noted above to navigate you through what may a volatile next few weeks/months.
About Price Headley
Price Headley is the founder and chief analyst of BigTrends.com, which provides daily stock and options recommendations and education. Timer Digest recognized Price and BigTrends.com among the Top 10 stock market timers for 2000. Price has been widely quoted by Barron's, CNBC, The Wall Street Journal and USA Today. Price is also the author of the new book, Big Trends in Trading: Strategies to Master Major Market Moves.
If you want Price to answer any of your questions on future web site updates, send an email to askprice@bigtrends.com or call 1-800-BIGTRENDS (1-800-244-8736).
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