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The CBOE Market Volatility Index ($VIX) is a contrarian index that essentially measures the level of fear in the market at any given time (which is based on market volatility). The lower the price of the index, the less fear in the market. Generally speaking, the less fear in the market, the greater the chances of a significant market correction being around the corner.
In mid-March, the $VIX was trading at its lowest level since 2007. Over the past month, the $VIX has moved slightly higher, and is now forming a short-term base just off its low. Given that we are now on a new sell signal, which means market conditions have suddenly gotten very ugly, there’s a strong possibility we will see a swift spike in the $VIX in the coming days (hence the potential buy setup in $VXZ that follows). The long-term monthly chart of $VIX is shown below:
Going into today, iPath S&P 500 VIX Mid-Term Futures (NYSEARCA:VXZ) is a new “official” ETF buy setup on our member watchlist. But first of all, I must be very quick to point out this potential trade does NOT fall within the technical parameters of our normal methodology for buying trend reversals. Rather, this is intended to purely be a momentum-based trade of a very short-term nature (estimated 2 to 5 days holding time). The daily chart of $VXZ is shown below:
Subscribers of our nightly momentum swing trading letter should note our exact and preset trigger, stop, and target prices for this short-term trade setup in today’s report.
We still have $QQQ on our internal watchlist as a potential short entry (or inverse ETF entry), due to the head and shoulders pattern on its weekly chart (review our recent analysis of $QQQ here on our trading blog). However, that setup has not yet met our requirements for new trade entry. Stay tuned for follow-up.