Kevin over at Kevin's Market Blog said it best on his Dow Theory watch; Dow followed Transports higher. While the Semiconductors did their bit to support the Nasdaq 100 with a breakout of their own: But there is the question as to what volatility (and fear) will do now there is a test of the 200-day MA? Will profit takers emerge? Or will the 200-day MA turn from support into resistance, thus supporting a more substantial rally than previous corrections in this indicator have given?

I took a look at the 2000 top for the S&P and compared how volatility from then compared to now. During the 2000 peak there were four small sub-30 micropeaks, a sharp drop, then a rally to 35 which was associated with the cliff fall for the early part of the 2001 decline in the S&P. Monday's peak above the recent triple top may precede such a decline, although breadth indicators do suggest otherwise (i.e. this will shape into a double bottom). However, it has been a while since the VIX has seen a spike to 45. It would be hard to argue against another one happening soon, which would mean more pain for the markets. The Fed may bring some short term welcome relief, but when the guts of next rally are done we could have the kind of setup where a VIX spike to 45 would be favored. Perhaps September/October of this year??? Who knows, but the beast is out there - lurking, waiting to strike.

There was an interesting relationship between profitable long trades in the S&P and the Zig-Zag indicator applied to the VIX. Over the past 10 years there have been 4 periods when a trade initiated at turns in the Zig-Zag indicator have turned profitable long trades - with no failures. The 'buy' side Zig-Zag signal has matched reaction lows in the S&P very nicely. The 'sell' side Zig-Zag signal has been a little early, although during the 2000-2003 Bear market it gave a perfect signal. However, one thing which has been consistent across 'sell' signals has been a lower 50-day MA compared to the 200-day MA. In the current market, this would approximate to another 6-months of VIX weakness/sideways action (and higher market prices). In terms of S&P returns it could be anything from 15-50% depending on market conditions (likely the lower end of this range for a bear market). Does this rank as another tick in the bull column?

The Nasdaq Bullish Percent turned bearish with a drop below its 5-day EMA. If this weakness was to represent itself in the index I would look for a new closing low for February (but not necessarily a break of the month's intraday lows). However, the index does sit close to a break of declining resistance connecting January, and both February reaction highs - a big day this week would break through this resistance and likely negate the 'sell' trigger in the Nasdaq Bullish Percent: Better was the leading action in the Dow Bullish Percent. It finished Monday at 33% having managed a new reaction high for the month. This strength filtered through to the index Monday when it made its first break of the two reaction highs for February. Look for this strength to continue with a further push above 12,750 (but 12,200 can't be violated on a closing basis): The S&P Bullish Percents has yet to push above its February reaction high. The action in the index is a little better in t

The McClellan Oscillators held their bullish form as bulls stepped in, with volume, to stall 3-days of declines. At least on a closing basis (ignoring the intraday range) both the Nasdaq and NYSE are on course for a double bottom; confirmation will come on a closing break of 2,400 for the Nasdaq and 9,250 for the NYSE. Dow Theorists will take comfort in the strength of the Dow Transports. Note how bulls maintained control as other markets reversed from their late January bounce [+DI > -DI; ADX > 20]. Stochastics are overbought which suggests a pullback to test the 50-day MA is needed to shake out the last of the weak hands. Volume in this index has certainly sided with the bulls. Volatility watchers are unlikely to see another spike into the high 30's on this decline, and those waiting for a second spike before buying are likely to be disappointed. A push back to the 200-day MA would look to be the most likely scenario. Nasdaq theorists will look for the semiconductors to

The stage is set for the capitulation: [1] Futures are horrendous [2] The VIX is ready to spike from its consolidation [3] Volume will no doubt be huge Grimace

Volatility and the S&P sit at two important tests; the S&P is nestled against 200-day MA resistance, while volatility holds at 50-day MA support. The relatively high volatility suggests a good deal of fear in the market which should be ( contrarian ) bullish for the S&P. However, the S&P sits at a ( potential ) major resistance level and with oversold stochastics for volatility combined with what looks to be a positive test of support at the VIX 50-day MA. It could be a rocky road down to August lows in a "Bah Humbug" kind of way for the Blue Chip average. If this turn of events was to occur it should reveal itself over the next couple of days. I suspect the next major downward turn for the market won't occur until Volatility makes its way back to the 200-day MA. So patient buyers might find some joy taking advantage of what could be a short, sharp, retreat for the S&P before rallying back to its 200-day MA (and possibly higher). , , ,