Mixed Signals and Weak Technicals - VIX and DJIA

The VIX's thrust to new highs from the 35-40 area to the historic 80 area in Sept. and Oct. brought the market to it's knees - from 11500 to 7500 in a month. Now the VIX is back to 40 and the market can't sustain any sort of rally that has legs - this may be problematic short term - and may be signaling more volatility soon.

VIX and DJIA show more range bound technicals and signals; even the possiblity for a scare of more volatility in the coming week or days. The last blog analysis of the VIX and DJIA relationship put the DJIA target at 9500 when the VIX would correct to the 50 area - it bounced and the market corrected from the 9500 area- that was correct, but what hasn't proven itself is the test of the 40 area on the VIX which, I believed, would have the DJIA higher than 9500 since the VIX at 50 equated to 9500 on the DJIA, so you would think a break into the 40 area would equate with a higher price than 9500. Well, the VIX is now at 40 but the market is well below 9500, it right now sits at dismal 8599, and well short of the 10500 target with a VIX at 40. With the VIX now at the 40 support it now seems like 25-35 area on the VIX would be needed in order for the DJIA target of 10500 to be achieved.

Looking forward, the VIX has still not hit its large support area around 25-35(congestion area), although a bounce on the 200EMA is currently in progress, and knowing the 50EMA is reading 50.40 on overhead resistance, the current bounce should have resistance there and come back down toward the ever so slight drag to the 25-35 area - maybe this can finally get the market back to 10500. What is concerning is that the DJIA hasn't moved far for a 50% correction in the VIX. Can the 25-35 area be the true test the VIX needs to be at before we see any sort of a sustained bull run in the DJIA - or is the VIX going to fade into the distance for the mean time while other patterns/indicators become more prevalent.

Assessing Breadth.

For many technicians, breadth indicators are key in confirming new uptrends or downtrends. If we look at the New Highs(end of day) to New Lows(eod) for the markets - this is nothing more the stocks making new highs(or lows) vs. the reciprocate - we can see favorable developments that confirma the market bottom is in. For instance, in the Nasdaq chart, we saw 1,600 new lows develop in October, but only saw 1100 new lows develop in November even as the market made new lows - stocks making new lows decreased from the October plunge to the November low. The same holds true for the NYSE which saw a positive divergence from the October plunge to the final low in November - 2400 to 1000 respectively.

The question now is what kind of reciprocate numbers can we see on the upside. How many new highs will be made on a market rally? Only time will tell, but there will be clues, you just have to quantify them.

Was the market bottom on friday?

I last updated a chart of the DJIA related to the VIX and the targets were hit - 9500 on the DJIA and the 50 support on the VIX. From there we saw some more volatility to the downside, but things have shifted once again. Look at the stochastic bouncing on the topside of the downward trendline from before. The VIX ROC is falling and the stochastic is crossing its %D negatively. And if we look at the ADX, the attempt at a breakout has not been confirmed with the ADX which made a lower divergence. Also, look at the volume - it is entering a new phase and produced one of the most powerful volume days yet! As for the bottom? - Only time can tell now.

Why the market bounce is for real!

After a violent and destructive thrust through the overhead resistance/ceiling of what "normal" used to mean on the VIX, The CBOE Volatility Index® (VIX®), we may now see momentum waning and a corrective course taking place. Look at the stochastic pulling a negative divergence on the recent high, the ROC(Rate Of Change) Indicator is falling and the ADX(trending indicator) looks like it has peaked - all for the meantime.

Lets look at the 50 as a short-term support and a possible intermediate trend downward back to the 35-40 area. The bigger question then remains if the VIX has now entered a new "era" where we will gauge market sentiment in between 30's and 80's, which would also mean more volatility. If this new era of the VIX does hold, then it will be a traders market with mini bulls, something that would resemble a channeling market. Or is this the ever so slow bleeding of the VIX back down to the 10 area? I guess you'd have to stick around for that one because its a long way off from here, but possible.

Let's now concentrate on the VIX short-term support zone(50's) and near-term zone of (35-40). This could act as correlation zones with the DJIA overhead resistances. I would equate the test of the 50 support area on the VIX with the DJIA 9500 overhead resistance. The 40 support area of VIX would correlate with the DJIA overhead resistance of 10500 - thats where the VIX broke the overhead resistance in late Sept/early Oct and the market crashed - yes, that was a crash.

Inflation and Deflation(Commodites vs Semis).

My assumption still stands: Semi's will outperform over near term and long term. Below is a chart comparing the Dow Jones-AIG Commodity Index (DJI) vs. PHLX SEMICONDUCTOR SECTOR INDEX (SOXX).

Notice the difference over the last 5 years: inflation was beneficial to commodities, while it hindered any sort of bull market for semiconductors. We have seen commodites prices ease(deflate) these last couple of months, and that means we are deflationary and Semis will counter - the next cyclical turn will have semis leading as deflation sticks around and commodities consolidate in its secular trend. This does not mean commodities will completely lag, but rather Semis should outperform in the cyclical trend, while underperforming on the secular trend.

You can view the full analysis blog called "The other Commodity" here.

http://polluxtechnicals.blogspot.com/2008/05/other-commodity.html

A short term triangle has formed on MU with good volume. Trade the bounces while keeping a long term position on hand.

The AIG triangle and Gap Fill

Target 10.00.

Stop-Loss 2.50

Risk with stop loss = - 40%

Profit Possibilities = +100%

What's the story? UNG vs. Natural Gas

Technically Examining: UNG vs. Natural Gas

If we look at both charts we can first see that the commodity itself is volatile in nature. The UNG or Natural Gas itself shows an extreme amount of volatility vs. things like GLD, USO, SLV, etc.

The best way for individuals to connect their investments directly to the price of natural gas, or other commodities, is to buy the ETF - a byproduct of the price itself that has been created by leading investment banks. The UNG was recently IPO'd last year and this is where technical analysis becomes fragile due to the nonexistence, or minimal existence of a "history" from which a technical analyst would draw from. At the current moment, the technicals on UNG have been decimated and will be volatile near term, and in corrective mode for medium to long term (6m-1y). One thing for sure about UNG is that the volume has entered a new phase of open interest which means more and more are flocking to this investment tool.

If we now center our attention on Natural Gas prices themselves, we can see more of a "historic" presence that exists. The recent move of natural gas from 5.5ish in the middle of 07 to 13.5ish just a couple of weeks ago is a 120%+ return, which is not bad for a commodity in such a short time. This correction still puts Natural Gas prices with a respectable 40%+ return from its low of 07.

Fundamental Difference.

One thing to examine is why natural gas itself is not trading at all time highs vs. other commodites, oil in particular. Oil is widely more used than natural gas, and only recently in the last decade has natural gas been looked at as a highly viable alternative. This means that the infrastructure for Nat Gas is not as extensive as oils infrastructure and this has to do with oil's deep integration into our lives vs natural gas. You might think about using natural gas in your home, if its available, but not many would think about a natural gas car, motorcyle, or lawnmower, etc.. This is why the price itself is more volatile than oil, and other commodites. Oil is available in many more facets of our daily lives, but Natural Gas is still neither here nor there, but that is improving and should continue to stablize prices themselves - natural gas needs more infrastructure buildout so that when we make energy decisions, its available.

One conintinet that has a better natural gas infrastructure is Latin America, and most notably Brazils healthy appetite for natural gas as an alternative to oil. Due to the abundance of natural gas in the valleys and hills of Brazil, Argentina, Bolivia, etc., Latin America has diversified its energy habits to include natural gas and the infrastructure buildout is more advanced. There are many natural gas piplelines that exist and many that are in construction, with Bolivia being the most notable new entry into the natural gas pipeline game in Latin America.

From the technical standpoint on UNG, one would want to evaluate their timeframe. The IPO gives it less history from which to draw from. You should look at Natural Gas resistance and support levels to coordinate buy and sell signals on the UNG. Natural Gas has had trouble with the 13-15 area - it has encountered turbulence entering a new price level. It could be becuase natural gas is a consumer adoption choice vs oil which is a consumer oriented need - we use more oil in our daily lives than natural gas. If we continue to see increased adoption and further penetration into oils consumer market share, then prices should break above that ever elusive 13-15 area. Until then, expect more volatility.

UNG

1m-3m: prices could see 50 but that is also resistance.

3m-6m: prices could see the a breaking of the 50 mark and enter new trading range.

1y+: prices could see natural gas moving towards highs.