The Volatility Index ($VIX) looks ready to explode, which could help us forecast the next major directional move in the major market indexes. Let’s take a look at a few technical factors in the $VIX, which could offer directional clues.
Saucer Bottom
The $VIX has been holding above a major area of support from 21.50 to 22.00 the last four months and has been hesitant to drop below this meaningful area on the chart. Every test of this zone has led to mild bounces in price, thereby creating an interesting pattern that could offer a much bigger move ahead – the saucer bottom.
A saucer pattern usually indicates a technical bottom in the charts – one that can lead to major rallies in price. The fact that the $VIX has formed this pattern above the 22.00 level is indicative of a potential rally ahead, which would forecast selling pressure in the broader market.
Resistance
Along with the saucer pattern, price has also formed an extremely clear level of resistance at 28.15 over the last two months of trading.
This is the level to watch for breakout confirmation from the saucer pattern. If price breaks through (and closes above) the 28.15 level, we could see a heck of an advance in price back toward the next area of resistance at 37.00.
This type of rally in the $VIX could lead to a major drop in the broader market averages, like the Dow, NASDAQ, and the S&P.
Neutral Moving Averages
The pivot-based multiple moving averages are neutral at this point, as well. This usually occurs just ahead of a breakout opportunity. As you can see on the chart, all three averages are virtually flat from 24.70 to 25.60 – right at the center of the saucer pattern.
This helps to confirm that price has been basing ahead of the next trending move.
Keep an eye on 23.40. A break below this level could indicate a failure of the saucer, which would then spark a potential test of support ahead.
Despite the typical August lull, these are Very interesting developments, and I believe they could lead to the next breakout move in the $VIX – which means big movement potential for the market.
Let’s see what happens!
Cheers!
Frank Ochoa
PivotBoss.com
Follow Frank on Twitter: http://twitter.com/PivotBoss