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Volatility under the hood – Divergence?

December 11, 2006
tags: ,

The market seems to be sort of sitting on its hands. All of the market technicians are pointing to a lower high on the Nasdaq and just slightly so also on the Dow. The SPX shows a bit of relative strength to them. However, nothing has shown a lower low and therefore, as difficult as it is to trust the charts sometimes, we have to recognize that we’re still in an uptrend on all indexes.
What is interesting is to look at the VIX volatility index. As we discussed in our recent meeting, it broke out of its months long downtrend signalling a red flag to pay attention for upward movement on this. It has since moved basically sideways but with quite unusual volatility. Remember the saying, “When VIX is low (and turns upward) it’s time to go.”
(Click images to see them enlarged.)

While the SPX itself looks still pretty healthy, the VIX shows a slightly different picture. While these two indexes run contrary to one another, comparison of the two shows somewhat of a divergence. Which one will prevail?

These images were made just before 1 PM today.
The market is probably waiting to see what comes of the FOMC meeting tomorrow at 2:15 PM ET. The world seems convinced they’ll leave interest rates unchanged. If they do make a change….watch out. There’ll be some big movement.
Here’s a good link for big announcements on the calendar for any given week.

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