This Fear Indicator Put the Bears in Charge for Now

This Fear Indicator Put the Bears in Charge for Now
By Jeff Clark
December 15, 2009

If you want to know what's going to happen between now and the end of the year, then keep an eye on the VIX.

We've kept close tabs on the Volatility Index in Growth Stock Wire this year (click to read my essays from March, September, and October). It's proved to be a good indicator of short-term market direction. Now, with the stock market confined to a tight, month-long trading range, and with volume drying up as Christmas and New Year's Day approach, it's worth taking another look at this crystal ball.

The VIX is best used as a fear barometer. A rising VIX shows increasing fear among investors and is commonly associated with declining stock prices. A falling VIX, on the other hand, indicates investors are less fearful and more willing to take risks. It often leads to rising stock prices.

Take a look at this 60-minute chart of the Volatility Index...

This chart measures the action in the VIX during 60-minute intervals over the past two weeks. Now, compare that chart to this one of the S&P 500 over the same time frame...

It's almost a perfect inverse correlation. While the VIX has been falling and forming a bullish falling-wedge pattern, the S&P 500 has been tracing out a bearish rising wedge.

Both charts broke out of their wedges during the final hour of trading yesterday. When a chart breaks out of a wedge pattern, it often leads to a sharp, fast move in the direction of the break. The VIX chart broke to the upside. If it plays out, we could see the VIX rally back up to the December highs near 24.

Of course, that action will pressure stock prices, and we could very well see the S&P tumble down to the lower end of its trading range, near 1,090, over the next couple of weeks.

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Keep in mind, we're looking at 60-minute charts – which are best used to analyze short-term market movements. They say nothing about the longer-term direction of the market.

But if you're looking to trade stocks over the next two weeks, the VIX suggests the bears will have the upper hand... er, paw.

Best regards and good trading,

Jeff Clark

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	Last	Change	52-Wk
S&P 500	1109.30	+1.45%	+27.03%
Oil (USO)	40.29	+2.99%	-12.75%
Gold (GLD)	111.63	+1.72%	+52.29%
Silver (SLV)	18.01	+5.01%	+92.41%
U.S. Dollar	75.37	+0.68%	-13.15%
Euro	1.49	-0.70%	+17.54%
VIX	22.89	-2.01%	-65.48%
HUI	475.53	+3.26%	+155.07%
10-Year Yield	3.33%	-0.10	-0.37

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Company	Sym	Industry
Merck	MRK	Big Pharma
Canon	CAJ	cameras
UnitedHealth	UNH	health insurance
General Dynamics	GD	Big Defense
Enterprise	EPD	oil & gas drilling
PG&E	PCG	utilities
Sempra Energy	SRE	utilities
Edison Intl	EIX	utilities
Yanzhou Coal	YZC	coal mining
Google	GOOG	online search
Verizon	VZ	telecom
Bristol-Myers	BMY	Big Pharma
Lowe's	LOW	home goods
WellPoint	WLP	health insurance
Best Buy	BBY	electronics stores
Starbucks	SBUX	coffee shops
Enersis	ENI	utilities
Progress Energy	PGN	utilities
IBM	IBM	computers
United Tech	UTX	conglomerate
Home Depot	HD	home goods
DIRECTV	DTV	satellite TV
Duke Energy	DUK	utilities
Sysco	SYY	wholesale food
Precision	PCP	metal fabrication
Zimmer	ZMH	medical devices
Marvell Tech	MRVL	semiconductors
J&J	JNJ	Big Pharma
Visa	V	credit cards
Alcon	ACL	medical supplies
MasterCard	MA	credit cards
XTO Energy	XTO	oil & gas drilling
Allergan	AGN	pharma
Telmex	TII	telecom
Spectra Energy	SE	pipelines
Progressive	PGR	insurance
AT&T	T	telecom
Arcelor Mittal	MT	steel
Medtronic	MDT	medical devices
Honeywell	HON	Big Defense
Simon Property	SPG	retail REIT
Northrop	NOC	Big Defense
Entergy	ETR	utilities
Vornado	VNO	retail REIT
Republic Svcs	RSG	garbage
Coca-Cola	KO	soft drinks
Walt Disney	DIS	entertainment
Altria Group	MO	cigarettes
Infosys	INFY	outsourcing
Raytheon	RTN	Big Defense
American Electric	AEP	utilities
Reynolds	RAI	cigarettes
ConEd	ED	utilities
Quest	DGX	medical research
Oracle	ORCL	software
3M	MMM	conglomerate
Boeing	BA	Big Defense
Philips	PHG	electronics
Norfolk Southern	NSC	railroads

Company	Sym	Industry
Alon USA	ALJ	refining
China Ritar	CRTP	electrical equip
Valence Tech	VLNC	electrical equip

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