Morning Briefing, 11/13/2002

[21st Century Alert]

Title: Morning Briefing, 11/13/2002

WEDNESDAY a.m. November 13, 2002   The Weekly VIX by David Nichols It continues to amaze me how this market looks and feels so much like the rally off the September lows last year . The washout bottom, the snapback rally, the sideways congestion -- it's all the same. During that rally phase, the markets did a tremendous job bluffing that a major collapse was always moments away. Especially right before the second leg of the rally. Now the daily chart looks very similar. We've had three red candles and an indecision day. So today's the day for the big white candle. If it's a big red candle instead, chalk one up for the bears. There's a trendy catch phrase familiar to all young parents now, called the "comfort zone". This refers to a place where your child feels secure and well-balanced. On the daily chart of the OEX, it's clear that investors have a "comfort zone" right now between 440 and 460 on the OEX. The market seems to be irresistibly drawn back into this area during periods of uncertainty. Right now we're right in the middle of the zone at 450. So now the big question is which way out of this zone will the market break. This is the million-dollar big picture question. And for the big picture, you've got to look at the longer-term charts. A look at the weekly VIX reveals a very bullish setup, and I believe it is this chart that is going to govern the behavior of the markets over the next six to nine months. I'm going to have to get a little more technical here than I usually do, but I promise, I'm actually trying not to be confusing. There is a great and popular indicator called the "Moving Average Convergence Divergence", which is known as the MACD (pronounced Mac-Dee). It is a momentum oscillator, and a great trend indicator. The MACD starts with the difference between two moving averages. The typical MACD calculates the difference between a 26 period moving average and a 12 period moving average, and charts this as the "fast line" (blue line). This fast line is then smoothed with a 9 period moving average, to come up with the "slow line" (red line). These two are then plotted in relation to the zero line, and the direction they move and when they cross over tells a lot about what's going on with the chart. On the weekly chart of the VIX, we can see an amazingly clear amplitude increase on the momentum waves on the MACD. During these latest two price bottoms in July and October, the momentum of volatility hit long-term extremes. I believe this was the climax of the bear market, in living color. A concept I bring up repeatedly is the fact that volatility is the only market trait that is anti-persistent. Volatility has a strong tendency to do the opposite of what it just did. You can see this very clearly on the weekly chart. It flip-flops between high volatility and low volatility. Price action is the opposite, and is very persistent. It trends. You can see this clearly on a comparable chart of price, over the same exact time period. So if we just had a climactic momentum high in volatility, then we can expect the anti-persistence to do its thing and move volatility down to the low end of its range. Clearly the momentum is now already moving in this direction on the weekly chart. Here's a close-up of the weekly VIX with the MACD: This is a very powerful force. I believe that this chart will now govern the way the market behaves over the next six to nine months. This is one of the main reasons I am expecting a "bull phase", as when the weekly momentum in the VIX is dropping, that is strongly correlated with a bullish phase for the markets. It's an uphill battle to fight the big-picture trend. It's better to flow with the trend. Last year it took a full six months for the spike in the VIX during the Aug/Sept sell-off to get worked off. Since this was a higher momentum high, then it could take even longer than that this time around. Of course lots of activity -- both up and down -- can go on beneath this bigger trend. Phil Erlanger and I disagree about which force is going to be ultimately more important in the market -- Phil believes that overhead resistance is going to be the dominant theme, and I believe the long-term momentum of sentiment will hold sway. So we'll see which way it plays out, and we shouldn't have too long to wait. Sentiment Analysis from Phil Erlanger   What's a Squeezeometer? More Definitions.   This Morning Briefing is brought to you by 21st Century Alert. Your 21st Century Alert subscription offers so much more. Click here to go to 21st Century Alert's Web site. You can find this article on the Web at: http://www.21stcenturyalert.com/page/tcx/morningbriefing/2002-11-13/ To remove yourself from our mailing list, or to get your username and password so that you can access the Morning Briefing archives on our Web site, click here.