A Surprising Lack of Fear
The market has been falling apart at the seams recently, but traders are not showing enough fear or bearish sentiment to signal that a capitulation stage has been reached. We have enough experience to know that the odds favor a continued decline until traders grow fearful and capitulate. We would consider a capitulation to be a spike in fear, as measured by a surge in the CBOE S&P 500 Volatility Index (VIX), in conjunction with an oversold condition in our indicators. The market has not reached this point yet, but we believe it is coming.
VIX -- Daily Source: MetaStock View Chart » View in New Window »For signals on spiking fear and extremes in sentiment that can be traded, we look for relative extreme moves in the VIX and in the CBOE Nasdaq-100 Volatility Index (VXN). If we see move in the VIX and VXN out past the 2-standard deviation band, that signals an extreme level of fear. We also confirm the move by looking at the seven-day rate-of-change indicator for the VIX and the VXN. Should we see the seven-day ROC move out past the 21 level, typically this means the VIX and VXN have moved to quickly to the upside. It should also signal short-term exhaustion in the volatility index....224 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.
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