View: VIX: Follow Up | The wave trading

Since VIX is one of my preferred indicators for evaluating a potential trend reversal of the equity market and as I have discussed in my last weekend technical update I am expecting a pullback, going forward I am going to monitor the fear index.

Two weeks ago in my technical weekend update I mentioned:

“In the weekly chart below we can make the case that the “fear index” has two potential patterns in play:

During May 2010 – August 2011, VIX established a huge Double Top at 48. Obviously the theoretical target would not be fulfilled but if VIX breaks down the declining trend line support, in the area of 13, in force since the April 2010 low then a move back towards the all time low at 9.38 should not be ruled out

A wedge is forming from the March 2012 low, in which case VIX is approaching a major reversal area as the mentioned trend line could be the springboard from where volatility should increase rapidly, although the wedge may not be complete yet. If we compare the other three times that VIX reversed from the declining trend line support the weekly Stochastic was extremely oversold, this time it different, hence we could make the case that we will have a positive divergence (We will have to check it with the RSI as it is a better indicator) if this is the case then the odds of the wedge scenario would increase.”

In the VIX weekly updated chart below we can see that so far the RSI is showing a positive divergence.

In the next daily chart we can see that VIX has a potential “small” reversal pattern = Double Bottom + Positive divergence of the MACD histogram.

The DB will be confirmed with an eod print above 13.88 while the theoretical target is located at 14.54

If VIX is unable to break the Resistance 1 = 14.77 then the expected equity pullback will be a shallow one, while a move above 15.41 could open the door to a mean reversion towards the 20 dma = 16.38 in which case we will be in the scenario of a multi-week equity pullback.