But it’s not going to happen if traders continue to play games with the VIX. The VIX peaked a week ago Friday at 25.14. You’ll remember that was the Facebook IPO day. Last week, with a market that was sideways to down at best the VIX closed at 21.30 which means no fear came into a market that could not get traction. Why did this happen? Simply put, traders negated all of the good work of building some fear and respect for the price action from earlier in the week. Always keep in mind this correction does not end until it gets the proper respect that it deserves. What that means is I wouldn’t even consider thinking about the real bottom until the VIX gets above 30.
If they would just keep quiet, we likely do not see these emotional swings from one week to the next. Think about what happens in the US. You rarely if ever see an elected politician jawboning the market DOWN unless it’s the opposition party in an election year. You’d expect Romney to talk about how lousy the economy is. But you are always likely to have Obama, Geithner and Bernanke put the best spin possible on at all times. Think about 2008. McCain, a war hero and a likable guy lost the election because he told the public a week before the Lehman BK the economy was just fine. It seems our counterparts in Europe have never learned this lesson.
So where does that leave us in the bigger picture? The SPX gives us some good insight. Once again, there’s good news and bad news. The good news? Prices stopped going down at the 38% retracement to the October low. If the market were to hold here, that’s a show of strength. 38% retracements usually lead to retests of the top and beyond. As you can see from this chart, the late October high at 1292 is also the first half of the move off the bottom. There is no real technical damage to the uptrend until this level is breached. That’s where the good news ends because everything we saw last week is pointing to the 38% line breaking. Trading behavior is not representing a low, nor is the movement in the Greenback, Euro or VIX. If we hit 38% plus a key polarity point and the VIX were near 30 then I’d be more optimistic. But every correction on the way down as to hit 38% at some point. The encouraging news in the very least is the pattern at least responded to it. What that means is we don’t have the weakest or worst case scenario working right now. But we do have conditions supportive of breaking below that 38% line.
What we want to see going forward is more stories about the potential for disruption in Greece. No, I’m not rooting for it to happen but let’s understand something. Markets are perverse mechanisms, the more complacency you see, the more pain the market has to go through. The more fear they can whip up and have traders respond to it, the closer we are to the end of it. Starting with the JPM story 3 weeks ago, we’ve experienced way too much in the form of complacency.
Click chart to enlarge