Stock Market Viewpoint

Stock Market Viewpoint
Reading the Tea Leaves...

Saturday, February 5, 2011

Nasdaq and VIX Correlation 2/5/11

Stock Market Technical Analysis

Click on above image to enlarge

Tonight's charts are to show the correlation between the Nasdaq and the VIX (volatility index).  In the upper chart pair we can see that in April 2008 and April 2009 the VIX got down to the 16 level in which the Nasdaq sold off in the months to follow.  The VIX has recently gotten back down to the 16 level again, and there have been widespread calls for a correction throughout the analyst world.  That would normally be the no-brainer call considering the history of this correlation.   Yet as you can see in the midterm chart of the Nasdaq that I posted last night,  the powers that be are pushing this market and are very determined to break it out of this market sell off pattern that happens when the VIX gets down to 16.  They are signaling that they will make a 3rd breakout attempt on Monday.  If they can force the Nasdaq above its upper brown channel line there will be a corresponding breakdown in the VIX below its red market sell off line.   This 16 level on the VIX is a huge line in the sand.  If they are successful, the Nasdaq could resume trading in the 14 -16 VIX range that it used back in the careless free money world of 2006-2007.

If this happens many will be tagging this point as the beginning of a new bubble in the Nasdaq.  For the short run this may be just what the economy needs, as Greenspan pointed out in a recent speech.

If the Nasdaq cannot breakout then the anticipated correction could start quickly.   The Nasdaq and the VIX can both trade sideways here for a while though.  The lower chart shows VIX weekly bars and it could obviously go sideways for another 2-3 weekly bars before we have a forced pivot situation.  Because the VIX is trading in the fairly wide brown line descending channel it has the time,  but within 3 weeks one of two things will happen:  either the brown channel will push the VIX down below the red line causing a corresponding breakout of the Nasdaq above its upper line,  or  the red line will force the VIX up out of the brown channel causing a corresponding drop in the Nasdaq.

The lower pair of charts show a close up view of the situation.  With Friday's close the VIX dropped to the 16 level again as the Nasdaq ran up to its upper line as shown in last night's blog.  The VIX doesn't hang around at the 16 level very long.   Monday may be a very active day.