Vix resistance at 72… tough spot to break. Do not short here!

Hi guys, just thought I’d share you some of my notes.  I took a quick look at Fly’s comment section, and things are really getting out of hand.  It seems like there’s some kind of investor civil war going on.  Have we forgot, the “enemy” right now is the Market?  Instead of battling each other, we’re supposed to figure out how to trade this market.

Anyway, I have a few things to share with you.  Both good cases for the bears and bulls.

Why I’m bearish in the long term:

1)  The trend is obviously down

2)  American fundamentals everywhere is damaged.  Legislation takes too long to fix things, and the market is forward looking.  If the Government delays, the market will be short-sighted.

3)  My key correlation signals that I derived from the 03-07’s over-extended bull rally are showing it is NOT a good time to go long once again(therefore, I rarely recommend any swing longs lately).  For example, I noted about two posts ago that AAPL, GOOG, RIMM, and VMW (pre-earnings) are less than 10% from their 52-lows.  Know that these lows WILL BE taken out, but give it a few weeks.  Companies like AAPL, GOOG, and RIMM were the last standing leaders of the previous bull market.  Fly wrote an article of how commodity stocks are emulating the .coms of 2000 and will probably rally which supports my wave theory…  Well, GOOG, RIMM, and AAPL are already at their late stages of that “leader-rally” wave, and A LOT of people are dumping their shares.  Please remember, AAPL is the #1 mutual fund stock out there, and is therefore an excellent gauge of market sentiment.  Anyway, if you’ve followed me over at thehawaiitrader.com these past few years, then you’ve probably noticed how I used these companies to spot THE TOP of the multi-year rally that ended at over 14,000 on the Dow.  I’m still using them until they do something with their trendlines.

Why I’m NOT bearish in the short term (I’d hate to use the word “bullish”, because that doesn’t apply):

1)  For those of you who follow the Vix, note in the past few days how it is struggling to take out 70.  I put 72 as an important resistance point.  Please note that as volatility rises, it becomes increasingly difficult to predict the Vix using numbers.  Hence, if you follow my method of using the Vix, instead of using numbers, use the “spikes.”  They can either go up or down, and they are what I call the “extreme levels of market/herd mentality.”  The 72 spot is making it difficult for the Vix to notch another “spike”.  Pay close attention to the 5-day chart of the Vix: 

… notice the dramatic fall in the Vix from 80 to 50, which is an astonishing 60% move!  I haven’t seen that ever on the downside.  Now notice there are two consecutive spikes in the Vix from Tuesday’s close, and Wednesday’s close.  Actually, Wednesday’s close was not a true spike, but rather a steep parabolic move up.  The best way I can interpret that is that many people holding longs in the past week were selling stocks in blocks, perhaps expecting the market to rally, but sold at every fail.  Hope trades I guess.  Anyway, my observance of the Vix scares me to be short here, again for 2 reasons:  1) there’s some resistance on the Vix at 72, and 2) We had almost 2 spikes on the Vix in the past two days.  So what does that mean?  It basically means “the easy money on the short side” is temporarily done.  If you’ve been short, then cover at least half.  If you’re not short, then DO NOT enter here!  If you’re searching for longs, then WAIT!  The best way to play a “double spike” on the Vix is to buy the next market that opens gapped down.  A strong gap down will probably get the Vix in the 72-75 range where I’d feel comfortable getting long or shorting inverse ETFs.  This is a conservative approach that will help you with your entry point… watch how the market responds to the gapped down open.  If there is a temporary bottom backed by volume, then start getting long some really over sold sectors (like banks, tech, shippers, and commodities) as the market moves up.  Immediately set your stops to the day’s low!  This is VERY IMPORTANT.  It eliminates your deceptive gut feeling that “this is the bottom.”  I was an avid programmer in college, and for you programmers out there you understand why its best to approach this market as an algorithm, using basic IF-THEN statements.  In other words, “IF the market moves in your favor”, stay the course.  ELSE exit.

Right now I think the best move is to hold a lot of cash, and play a counter-trend rally.  There may be one coming up, and if it does, make sure you use leverage on your day trades, and keep your swing longs small (maybe 1/4 position).  Cover shorts on the way UP, and wait to re-enter shorts as many beat up stocks approach resistance points again.

Hope this helps!
Aloha,
Gio

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