Thursday, September 13, 2007

VIX Contraction

The markets rallied again today, but volume was not convincing. Compounding market contortions, the NYAD managed to hold a relatively narrow range but TICK was downslope for the last 2.5 hours and the VIX was decidedly upslope. The program traders' footprints were all over the place today and I'll be dealing more with that issue this weekend.
The Qs are now showing under performance relative to the DOW. This may be a case of catch up, as the reverse has been the situation for the past 2 weeks. The Qs are also slamming against substantial resistance at 49.50, but are not overbought at this level. If we do get an intraday pop to 50, I'm inclined to view that as an opportunity to fade.
On a 6% range day the VIX went nowhere (.25), so we are seeing a volatility contraction at work here. This may be a a precursor for next week's triple witching, which according to the Stock Trader's Almanac has a truly dismal performance history (think DOWN), or the pre-FOMC contraction noted by VIX and More and referenced yesterday. I'm watching this situation closely to see how it plays out tomorrow. If the VIX continues to exhibit contraction in the face of a wide range market move I would be inclined to sell the VIX on Monday.

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