Sep 20, 2010

Rally Could Continue

Last week I pointed out the accuracy of using market breath indicator like percentage of stocks above their 50 MA compared to the moves of broad market represented by S&P500. I’m continuing following this indicator and adding another one. VIX is well known as a market fear indicator. It moves inversely with the market and entering certain levels shows clear signals of market reverse.
Source: indexindicators.com 


As seen from chart (more charts at indexcharts.com) the market (right hand axis) continued last week rally pumping stock prices higher with almost 73% of them above 50 day moving average. Thus indicator (green line, left hand axis) has reached levels close to overbought area. The overbought area is determined by +1SD (standard deviation) of the followed indicator. As I mentioned in previous post this has to be considered as a cautious signal, however it does not mean immediate fall. Indicator could stay at this area for a long time. VIX indicator is supporting this argument. At the moment VIX is 22.01. Values above 30 are considered to sign panic markets while lower measures point low volatility and growing stocks. Still there is more place for VIX to fall before it reaches overbought levels of the market. There is pattern for this indicator. Usually it saturates around oversold levels before reverse (market falls), which means rally can continue. 
Source: indexindicators.com 

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