The CBOE Volatility Index (VIX) is a key measure of market expectations of near-term volatility conveyed by S&P500 stock index option prices. VIX has been considered by many to be the world's premier barometer of investor sentiment and market volatility.
Major events that created the fear in the market might not be the same at different times but the investors' reactions under the state of panic do not vary.
On 6 Mar 2009, S&P500 fell to a new low and rebounded strongly thereafter. My brother asked if it would make another new low later? To answer that, we re-visit major market bottom in year 2002/2003.
In the 1st set of charts, the top shows S&P500 Yr 2002/2003 (CHART 1A) and the bottom shows VIX Yr 2002/2003 (CHART 1B) . Let us look at VIX first. VIX rose from below 25 in Jun 2002 and made 4 peaks marked PH1, PH2, PH3 & PH4. During that period, S&P500 was confined to the floor zone. Only after VIX fell below its 200ma line and S&P500 crossed above its own 200ma line, S&P500 resumed up trend move.
In the 2nd set of charts, the top shows VIX Yr 2008/2009 (chart 2b) and the bottom shows VIX Yr 2002/2003 (CHART 1B). The wave patterns of both charts look similar. We could easily identify the four peaks in "chart 2b" and marked them PH1a, PH2a, PH3a and PH4a accordingly. The similar VIX wave patterns confirm our earlier assumption on human reaction to panic situations.
In the 3rd set of charts, the top shows latest VIX Yr 2008/2009 (chart 2b) and the bottom shows latest S&P500 Yr 2008/2009 (chart 2a). The 4 identified peaks in VIX found corresponding 4 bottoms in S&P500. Assuming the S&P500's wave pattern in 2002/2003 were to be repeated in 2008/2009, S&P500 should have started the up trend move since 6 mar 09. For confirmation of the pattern, however, S&P500 must rise above its 200ma line and VIX move below its 200ma line. Thereafter, we expect VIX to stay below 30 so that S&P500 will be less volatile.
With charting software, the rising trend of S&P500 is projected to hit 1000 marks from around mid April 2009 onwards. The corresponding VIX is expected to fall to 30 or below. Only time can tell if the target bars are good projections. One must not regard them as holy grail and ignore the market calls.
SG does not have an index similar to VIX. Since US market has great influence over other markets including STI, we may use S&P500 and VIX as good proxies.
Caveat emptor
Posts
