VIX Coming Into Support–Here’s What That Means…

July 11, 2005
Chris Curran

The equity markets managed a pretty impressive week of
trading, with the big news undoubtedly being Thursday’s terrorist
attack in London.Â While European markets finished firmly lower Thursday, the
major indexes in the U.S. were able to post a solid upside reversal.Â This set
the stage for one of the largest rallies of 2005 on Friday.Â Small-cap shares
were the standout group, as the Russell 2000 was able to post a new all-time
high.Â More specifically, Tech shares displayed leadership, with Chip names
especially strong.Â Volume was a bit higher than what weâ€™ve seen in prior weeks,
while overall breadth on both the NASDAQ Composite and NYSE was positive.

The
September SP 500 futures closed out the week with a loss of -24.75 points, while
the Dow futures posted a larger relative loss of -318 points, with both erasing
more than 2 weeks of gains.Â On a weekly basis, despite the week’s gains, the ES
and YM both are still not in the clear to negate their Head & Shoulders
patterns.Â Looking at the daily charts, both contracts could take a pause here,
but the ES really has no resistance up to its June high at 1225 while the YM is
coming into a previous resistance area at 10570.Â For you daily 3-Line Break
followers, the ES is moving up into its Break Price of 1220.50, while the YM
broke long with a new Break Price of 10288.Â The VIX is coming into its support
area so we could see some consolidation/retracement here to work off the
short-term overbought condition.

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Much of
Friday’s rally likely stemmed from the perception that the terrorist events in
London could result in looser monetary policy on a global basis.Â Most of
Europe, which has by far been the weakest growing continent, could see
Thursday’s attack as further reason to start lowering interest rates.Â While
this could be true in Europe, I doubt this would be the case in the U.S.Â
Short-term rates remain well below historical norms, while both commodity and
real estate prices continue to climb.Â So, any further rally based on the
possibility of the Fed stopping their tightening could be pretty misguided.

Since the
current rally is largely not related to the Fed stopping its tightening, there
is probably more to the story.Â With Technology shares continuing to display
leadership, it’s quite possible that all the talk of a turnaround in many
segments of the sector is true.Â The Pacific Rim and Latin America also remain
quite strong, which could further aid the momentum in the Tech sector.Â Once
strength starts, it rarely ever suddenly ends.Â So, heading into this earnings
season, I wouldnâ€™t be surprised to see some decent reports by the Tech sector
for the prior quarter.