Today has been an interesting day for US equities which has seen the DOW trade in a very narrow 50+ point range accompanied by relatively low volume, which may signal the start of a correction the rally which started back in September 2010 when the index was trading at the 10000 level. For a view of whether this is merely a temporary staging post to a move higher or whether we are at the start of a significant correction we need to turn to the VIX, the CBOE indicator of volatility for any clues. As stock traders will know the VIX is also known as the fear/greed indicator and correlates inversely to equities – as the saying goes: when the VIX is low it’s time to go, and a look at today’s chart does indeed show that the index is approaching levels last seen in April/May of 2010, at around the time of the dramatic “flash crash”. The VIX has become complacent and as stock traders we must take heed and be prepared for the index to drift sideways whilst we wait for further warning signals of a technical nature.
Whilst the VIX should only be seen as an early warning system at present there is nothing from a technical perspective that any sharp pullback is imminent on the DOW with prices continuing to hold above all four moving averages on the daily chart. A quick look at the Russell 3000 paints a similar picture with this broader based index once again holding well above the 9 and 14 day moving averages.
At time of writing the DOW is at 11,707.