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Advanced Technical Analysis - VXO

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Note: the following analysis is formulated as an assimilation of Fibonacci, DeMark, Elliott Wave and other technical indicators. It is offered as education and not intended as advice in any way.

Our October 5th note on the CBOE OEX Volatility index, the VXO, noted that several trend reversal indicators we use were suggesting that "these technical indicators strongly suggest a major reversal in the VXO (up toward higher implied volatilities) could be in the offing in the next 2 weeks if last Friday's low did not already produce such an important low."

The move up from the lows registered on 10/1 has, so far, many of the earmarks of being an impulsive, trend changing move. In particular, the hourly chart shows what can be considered a clean " 5" wave move up from the 10/1 lows, where wave 5 was equal to roughly 3/5ths (a rough approximation of phi or 0.618) the distance from the wave 1 trough to the wave 3 peak (a common relationship within an impulse wave).

The decline from the peaks in the VXO set on 10/14 has so far taken a corrective look, possibly tracing out an ABC flat correction, where the A wave took place from the 10/14 peaks to the lows set on 10/19, the B wave from the 10/19 lows to yesterday's (or today's is a new swing high is put in) peaks, and a C wave that takes the VXO back down to the 61.8% support level around 14.45 or so. Momentum in both hourly and shorter time frames is confirming this wave count, and does indeed portent higher prices.

We would note that, from a Fibonacci time perspective, the "5" wave impulsive move up from the 10/01 lows took 14 days to complete. A correction of that 14 day impulsive move up would itself be 14 days this coming Thursday, 10/28. Oftentimes, as we have noted, Fibonacci time and price relationships are found within the price pattern for various stocks and indices. If so, then we could look for the VXO to complete a corrective decline around 10/28 (+/- 1 day) and around the 14.45 price point (+/-). An impulsive looking move up in the VXO from around this price point and around this time frame could then be expected to move to the next layer of Fibonacci resistance at least at 20.75 if not the next layer at 24.50.

We would note parenthetically that this VXO pattern is consistent with the existing bearish patterns in the rest of the indices we follow (SPX, INDU, and NDX). Stay tuned, the market's volatility may be in for a non-trivial increase shortly.

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