What The Current VXO Reading Means To You

  • June 9, 2004
  • Derrick Hobbs

Oh,
I’m sorry is the market closed? (as I dab the drool from the
corner of my mouth and splash cold water on my face)  The VXO (Volatility
Index) is breaking down into multi year low territory. Complacency (and
boredom) has set in. The VXO is now at 13.75. This number right here, right
now suggests that the market is the least “fearful” that it has been since 1996!
That’s 8 years for you math majors. What I find interesting about this chart is
that we have a “bullish” set up developing (bullish VXO = bearish stocks by the
way) .  I have a MONSTER support zone from 9.22 to 12.64. This zone represents a
Bullish Butterfly pattern which would suggest that VXO could explode to the
upside out of this zone. So what does that all mean? First, it means we still
have some more downside to deal with in the short term…at least down to the
12.50-.75 range. There are also a couple of other conclusions to make here:

 

1)     
Option premiums (in general) are
relatively low, and in many cases at all time lows due to the volatility
component being next to nothing.  If/when our pattern completes in the VXO,
volatility should ramp up. In general this means option premium should also rise
benefiting option owners. These are general market statements and
each option/equity should be analyzed on its own premise.

2)     
The VXO typically moves opposite the
market. So if volatility ramps up then equity prices tend to travel south.

 

 

Next lets take a look at a
stock that we bought at the end of the day in our chat room, in Barr Pharma (BRL).
Check out the weekly chart below:

 

1)     
We are hitting a large Fibonacci price
support zone from 36.27-38.60.

2)     
The stock has completed a 5 wave
series into this support zone. This suggests a 3 wave series up is in order per
E-wave Theory.

3)     
This decline is at 19 points. The
previous decline was 18 points. So we have symmetry of corrections.

 

 

Mix these three parts into the
pot we had reason to enter a long trade around today’s close. My stop is just
below the Fibonacci price support zone. I’ll keep you posted.

 

Housekeeping:

 

From my previous column: The
updated resistance zone on MERQ is 49-51.50. With a Bear Gartley complete on
this chart I’m shorting at 48.69. If triggered my stop will be 52.11.

Derrik Hobbs