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Next Week's Market Charts That Matter

Tyler Durden's picture




 

As usual, the most comprehensive stack of technical analysis comes from Goldman's John Noyce who is rarely afraid to go out on a limb. Among the key charts to track, number one is the VIX which recently blew out to prior resistance levels at the 49 mark, which happens to have been the peak during the October 1997 Asian Crisis, the October 1998 LTCM crisis, September 11, the July 2002 equity bear market, and the first Eurozone insolvency in May 2010. For now this level has held, and with major central planner intervention it appears that a base is now being built below it. Of course, all this means is that when the current round of global intervention fails the deferred risk will simply send the VIX to new unseen heights. The only question is when.

More details from Noyce:

The VIX moves to the “make or break point” and holds for now…

 

This seems to make it reasonable to argue that markets can now enter a period of consolidation following a move to targets in many risk appetite correlated FX pairs and equity indices

  • This is a very similar chart to that which has been included in a number of the daily/adhoc updates over the course of this week. It does appear important to focus on it heavily at times of market dislocation such as this as it gives a guide as to how much bad news (or maybe better put; fear) is priced into the market.
  • Looking back over the past 15+ years, with the material exception of Q4’08, all major cyclical peaks in the index have been set between 48.20 and 49.53;
    • October ’97 – Asian Crisis
    • October ‘98 – LTCM
    • September ‘01 – 9/11
    • July ‘02 – equity bear market
    • May ‘10 – Eurozone funding crisis
  • Under “normal” market conditions this all tends to argue that now’s a good time to take a more neutral stance towards risk appetite correlated markets and to watch how price action develops.
  • Thinking ahead, if at any point the index does push beyond 50, it would be a clear warning that a far more negative backdrop was likely in the process of developing. The only time this has happened over this time frame being in Q4’08 (and for full disclosure the index did also move very marginally above 50 in Q1’09).
  • From a pure technical perspective a push above the May ‘10 high at 48.20 would complete a double bottom like pattern with an extrapolation target of 81.25.

And for the correlation types, here is the VIX and the S&P

Although the finer points can be debated, the basic relationship between the VIX and S&P is that, with the exception of Q4’08, when the VIX moves close to 50 the equity market has historically been at, or very close, to stabilising. Subsequently it tends to at minimum enter a period of consolidation or alternatively begin the process of building a significant base

 

Really again this leads back to the same conclusion as on the prior slide. The fact the VIX has been to 48.00 doesn’t itself mean it’s time to run head-long into risk appetite correlated markets – there could still be significant volatility, but it does argue that a more measured and “tactical” trading approach probably now makes sense.

 

With this in mind, from here it seems best to be open minded to signs of a base developing on risk appetite correlated markets. But with a very clear “stop” on that theme if the VIX begins to push above 50 (only seen in Q4’08 and would complete a double bottom on the index targeting 81.25).

Much more in the complete packet below. And for the lazy ones out there: no podcast this week.

 

 

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Sun, 08/14/2011 - 14:19 | 1559189 WestVillageIdiot
WestVillageIdiot's picture

It's a rainy, crappy day in Wonderland today.  Looking at that shithole known as Wall Street now.  It is dreary and depressing.

I would love to see how stocks perform based upon the weather of Lower Manhattan.  Somebody should do a study.  We are expecting rain for the next 2 days.  Those a--holes have to be pissed that their weekend in The Hamptons, or at The Shore, are being washed out.  Somebody is going to pay, 

Buy LULU. 

Sun, 08/14/2011 - 19:56 | 1560089 chump666
chump666's picture

damn nice lofts around Wall Street...

Sun, 08/14/2011 - 14:27 | 1559203 FLIP THAT BOND
FLIP THAT BOND's picture

I wonder when the Treasury plans on paying back federal pension funds that it stole money from during the "extraordinary measures" taken so the US didn't have to default.

Sun, 08/14/2011 - 14:42 | 1559217 speconomist
speconomist's picture

Have you read what it's mentioned about AUDUSD being overvalued taking in consideration the 2-year rate spread?

Any insights from anyone?

Sun, 08/14/2011 - 16:24 | 1559497 macholatte
macholatte's picture
Morgan Stanley: The Aussie Dollar Is Wildly Overvalued,

Read more: http://www.businessinsider.com/morgan-stanley-the-aussie-dollar-is-wildly-overvalued-and-household-debt-is-enormous-2009-11#ixzz1V2KW09xy

 

that was Nov. 12, 2009 when it was around $.85    

It was overvalued at $1.10 but now it's at $1.03 ..... problem solved???  Who knows?

Sun, 08/14/2011 - 20:01 | 1560097 chump666
chump666's picture

crazy bullish CB in Aust that have created a interest spread that investment banks get ole hot and horny about. plus the HFT's bidding.  Short of the century is on the AUD.  Meantime it's out of the money/non margin plays following the HFT pattern.  Then another major sell off, like last week (now one week and counting for the next big leg down). 

Sun, 08/14/2011 - 14:34 | 1559218 buzzsaw99
Sun, 08/14/2011 - 14:38 | 1559223 dwdollar
dwdollar's picture

"But with a very clear “stop” on that theme if the VIX begins to push above 50 (only seen in Q4’08 and would complete a double bottom on the index targeting 81.25)."

Ah yes...  The S&P does looks cheap... until it gets cheaper.

Sun, 08/14/2011 - 14:38 | 1559226 ISEEIT
ISEEIT's picture

Risk on or risk off. That is all that you need to know today.

Read about AUD/USD overvaluation about 700 pips ago.

Sun, 08/14/2011 - 14:42 | 1559233 Thurifer
Thurifer's picture

"Winter is coming...."

Sun, 08/14/2011 - 14:45 | 1559237 Threeggg
Threeggg's picture

Here Comes the European printing press !!

It's been argued since the beginning of the European sovereign debt crisis that the only way to actually solve things would be to create fiscal union via the establishment of euro bonds.

 

Germany has long been opposed to this idea.

From Reuters:

The German government no longer rules out agreeing to the issuance of euro zone bonds as a measure of last resort to save the single currency, conservative newspaper Welt am Sonntag reported on Sunday

Read more: http://www.businessinsider.com/germany-open-to-euro-bonds-2011-8#ixzz1V1wuMBGA

 

Sun, 08/14/2011 - 14:57 | 1559258 cossack55
cossack55's picture

If memory serves, Scorched Earth did not go well for the last Reich circa 43'-45.

Sun, 08/14/2011 - 15:30 | 1559334 speconomist
speconomist's picture

Almost 200 pips? Sounds like a plausible strategy for me too. Much more than plumetting to 0.85.

But I have to recognize that the chart from the pdf about the 2-year rate spread left me really confused.

Sun, 08/14/2011 - 15:39 | 1559352 bonderøven-farm ass
bonderøven-farm ass's picture

Martin Armstrong......(08-11-11):

          As Europe prepares to implode, The European Central Bank (ECB) is like the Dutch boy sticking his finger 

in the dike. Instead of fixing the system structurally, they are vowing to buy Italian and Spanish bonds to 

support the market.  This is the European version  of QE2.  Let’s follow this through to the logical 

conclusion. Is the  ECB willing to permanently buy all the debt of troubled nations? Or is it simply a 

measure like Japan where the government wiped out the Postal Savings Fund $1 trillion desperately 

trying to support their bond market. This is the whole problem. Everything is reactionary and seen to be 

a temporary fix. The wound requires stitches, not band aids. Italy is the THIRD largest debtor behind the 

US and Japan. It is too BIG to be bailed out. Either Europe consolidates ALL member debt into a single 

EuroBond issue, or it should sell tickets to the fireworks display that will eventually take place.

Sun, 08/14/2011 - 16:31 | 1559510 macholatte
macholatte's picture

I stuck my finger in a Dyke once. I'll never do that again.

 

http://babylonfalling.tumblr.com/post/2978954806/ruby-the-dyke-and-her-six-perverted-sisters-stomp

 

 

Sun, 08/14/2011 - 16:37 | 1559528 slewie the pi-rat
slewie the pi-rat's picture

Specifications

The VIX is calculated and disseminated in real-time by the Chicago Board Options Exchange. It is a weighted blend of prices for a range of options on the S&P 500 index. On March 26, 2004, the first-ever trading in futures on the VIX Index began on CBOE Futures Exchange (CFE). As of February 24, 2006, it became possible to trade VIX options contracts. A few Exchange Traded Funds seek to track its performance. The formula uses a kernel-smoothed estimator that takes as inputs the current market prices for all out-of-the-money calls and puts for the front month and second month expirations.[2] The goal is to estimate the implied volatility of the S&P 500 index over the next 30 days.

The VIX is the square root of the par variance swap rate for a 30 day term initiated today. Note that the VIX is the volatility of a variance swap and not that of a volatility swap (volatility being the square root of variance). A variance swap can be perfectly statically replicated through vanilla puts and calls whereas a volatility swap requires dynamic hedging. The VIX is the square-root of the risk neutral expectation of the S&P 500 variance over the next 30 calendar days. The VIX is quoted as an annualized standard deviation.

...almost theological...

...sigmoid BiCheZ!

Sun, 08/14/2011 - 17:12 | 1559642 ActionFive
ActionFive's picture

If the VIX is a tool for market valuation.

Then you know it has to be rigged.

Sun, 08/14/2011 - 17:22 | 1559661 topcallingtroll
topcallingtroll's picture

In the meantime party down!

I knew as soon as I got scared enough to buy gold it would go down. I am a george castanza investor. I succeed by doing the opposite of my impulses.

Triple down on stocks for a few weeks.
Suck a dick if you have to. Steal an old lady's
social security check. Just get in the game.

Sun, 08/14/2011 - 17:56 | 1559780 Bobbyrib
Bobbyrib's picture

There will probably be a bit of a rebound in 2 minutes.

Sun, 08/14/2011 - 17:38 | 1559715 JW n FL
JW n FL's picture

But.. BUT! BUT!!

what about the Trillions Pumped into Wall Street?

how can this be?

America is has pumped the markets so that the Major Players could sell off before the major down slide?

so that the Major Players could buy back in at a discount??

but what about Main Street?

They are Fucked coming and going?

now is the time to tighten our belts and dig in for the hard times? after the powers that be have been re-capitalized?

but what about all those little people?

why do we need to kill them off for?

is the quality of life really going to be that much better for those at the top once they are all gone?

how much energy can they really use?

are they all so tapped out that not one more drop of blood can be squeezed from them?

what a shame that the ruling class has decided that the World is a better place minus as many of the little people as possible.

 

wait? where is my tin foil hat and my alien space ship? we need to detract from the facts above some how to create a sense of comfort within the sheepish consumers who have lost the credit worthiness! LOL!!

Mon, 08/15/2011 - 02:10 | 1560743 hungarianboy
hungarianboy's picture

Finally, thnx.

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