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SH @ the close 12/14/2011: Markets negate would be bullish pattern; deciphering the VIX | Stock Haven | Stock Chat Room | Penny Stocks | Options |Stock Haven | Stock Chat Room | Penny Stocks | Options |

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SH @ the close 12/14/2011: Markets negate would be bullish pattern; deciphering the VIX

Even as the markets had lost ground 3 out of the last 4 days there was still hope for the bulls coming into today. The S&P500 was still above its 50 day sma and above 1,215, a level that represented what could have been the right shoulder to a bullish inverse head and shoulder pattern. We pointed out the potential pattern this morning but after today’s close at 1,211 it appears the bearish double top at 1,267 is the only technical pattern in play.

Now we’re going to try to decipher the recent action in the VIX. The VIX has been down alot recently even as the markets have been declining, straying away from its typical inverse relationship with the S&P500.

contrarian take: big money is shorting this market as evidenced by the recent decline in the VIX

The VIX we know is a measure of implied volatility 30 days out by taking the ratio of puts/calls purchased on SPX. With SPX declining over 4% since 12/7 one would think that the VIX should be moving higher. But the VIX has actually declined 11% over that same time, the interpretation is that not that many people are buying puts on SPX at the moment.

2 potential reasons:

1) protection is just simply too expensive at the moment

2) they’re buying calls instead of puts to hedge against short positions they are building going into 2012

Our take? Protection doesn’t seem too expensive to us. As of yesterday the SPX 1,200 january 21 ’12 strike put was going for $22. That’s an implied decline of roughly 5%, certainly doable in the environment we have seen the lat 4 months. Therefore we don’t think you can say the VIX decline is due to protection being too expensive.

The take away?

With the markets now below key technical supports and the VIX low relative to recent levels there is the potential for an ugly ugly day, like 500 point down day ugly. What would be the technical catalyst to bring it on? A breakdown below the psychologically important support of 1,200.

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