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TECH-NOTE: VIX Short-Term vs. Mid-Term Futures - An Alternate, Relative Strength View:

VIX:
VIX stands for Volatility IndeX - It inversely measures the implied volatility of the market, such that a declining market will cause VIX to rise, and a advancing market will cause VIX to decline.

More specifically, VIX offers a composite view of at-the-money puts and calls options trading on the most liquid market: The SPX 500 - Offering traders the largest sample of directional forecast at any particular timeframes (daily, weekly or monthly).

READING THE CHART:
In pitting the short-term VIX futures (VXX) against the mid-term VIX futures (VXZ), I have put together a chart that presumably provides early signals of market reversal. Therefore, a rise in the chart indicates a relative BEARISH, short-term market downturn, whereas a decline in the chart indicates a BULLISH, short-term market upturn.

Although this relative strength chart on VIX futures only covers some twelve month of data, there is already a sense in the data that the market might - just might - be turning.

TECHNICALS:
Technically speaking, this 12-month, daily chart remains extremely BULLISH since MAR 2009, the time that the market marked its sustained rally. Hence, the sustained depressed RSI, and secondary indicators (CCI, Wm%R, CMF) dwelling in the red the majority of the time.

HOWEVER, some important negative divergences have developed over time:
- RSI remains in a relative negative divergence;
- MACD remains in a protracted negative divergence since mid-JULY 2009;
- The institutional buying indicators have recently developed a same negative divergence, namely: ChiOsc is diverging against A/D and OBV lines - A discreet signal which has provided consistent reversal signals in other charts.

OVERALL - Although not confirmed as of yet, the market is forming contradictory signals that contrast with prior positive divergences that have dominated the rally. Expecting the market to consolidate at this time might be more prudent than expecting a continuation of the rally, IMHO. But, expecting the market to decline based on the paucity of clear signal would be too premature and way speculative at this point. In any case, there is still reason to think that things are turning around, especially if this VIX relative strength chart starts to rise above prior highs.

This same and other more abstract charts can be read at: http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID2140281


VIX Short vs. Mid-Term Futures - 12-Month, Daily Chart:


- Dalcindo