This is now becoming a full blown fear. Kind of like the vxn falling wedge mother of all vxn rallies that never materialized back in 2003 that was going to take the market to dramatic new lows.. Too much fear in this market only means that an intermediate term low is very near. Does anyone remember the Zeal article from Feb. 2003. Let me remind you.
safehaven.com
Highlights from the article:
Even though the VXN is much younger than its spiritual ancestor the VIX, it is still valuable to monitor today, especially as a secondary trading indicator. It captured Dan Basch's attention lately not because of a new low or new high, but because a powerful technical pattern was emerging, the mighty falling wedge. Our next graph zooms in a bit to highlight this fascinating development.
Since about the middle of last year the VXN has interestingly been winding itself tighter and tighter in a colossal falling wedge (or descending triangle), highlighted above in red. With multiple VXN bounces off both the bottom support line and top resistance line of this falling wedge, this technical formation is remarkably well-defined. The implications of this development are stunning and bear careful consideration by all active index speculators.
Falling wedge technical formations are interesting because they usually almost always precede a significant event, a sharp and aggressive breakout to the upside out of the falling wedge formation. When Mr. Basch and I were talking about this development earlier this week, he shared various historical stock charts with me of falling wedges leading to huge upside breakouts. At Zeal we are familiar with this pattern as well, and as I mentioned above we have used this technical formation in the past in analyzing gold and oil and have been blessed with much success.
This colossal VXN falling wedge apparent above has a high probability of exhibiting similar behavior. As the current NASDAQ downleg already in progress accelerates, fear will continue to grow among general investors, slowly at first and then exponentially as we near the next fabled V-bounce. As I have discussed in many past essays on volatility, it is always spawned by the selling and fear that perpetually mark interim bottoms. As fear in the current NASDAQ downleg gathers steam, the VXN will break out of its falling wedge to the upside with all the fury of a runaway freight train.
When an upside breakout from a massive falling wedge occurs, a high technical probability exists that the item breaking out will rocket up to challenge its recent highs in a relatively short period of time. For the VXN, as noted in the first graph above, high levels so far in the game appear to cluster around a 70-85 range. Dan Basch's own highly mathematical and precise technical analysis points to a post-wedge-breakout VXN target of 78, right in the middle of the visual range from the first graph above.
Naturally the volatility-based VXN and the QQQs have an inverse relationship, so a rapid upside breakout in the VXN is almost certainly going to coincide with vicious selling on the NASDAQ as we head into the V-bounce consummation of this current brutal Great Bear Bust downleg. Indeed, in a causal sense it is the NASDAQ selling that spawns the VXN spike, not the other way around. |
