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Looking for an Edge



It seems like it is feast or famine here on the street of dreams and I just don't know which one. All my near-term indicators are basically neutral, the market remains in the middle of the trading range, and the volatile earnings reporting season and Passover and Easter holidays are rapidly approaching. Basically, there's a feeling that something big is about to happen. Everything cannot remain neutral forever.

Stuck in the middle for now

One indicator that could serve as a guide to the next 5% move is the CBOE Market Volatility Index (VIX). Since last October, anytime the VIX moved toward 26, a decline wasn't far behind.

One-year VIX shows key testing ground

Typically, a low VIX suggests complacency or comfort in the markets and serves as a signal that too many people are expecting upside action. It is a contrary indicator. When the VIX is low, it is typically negative for the market and when it is high, it is positive for the market. So the key is to figure out what is considered low. The VIX may be low at 26 since last October, but it can easily move toward 20.

Two-year VIX shows support at about 20

The point is that if this rally is like prior rallies in the range, the market should stop going up here as the VIX is near 26. If the move is more significant and has potential to move to the upper end of the range (SPX 930ish), then the VIX should give traders a sign by moving (and staying) below 26. It is very important to note that the upside move -- if it even happens -- is likely limited to the upper end of the range because of the intermediate-term reasons I outlined last week.

In a sea of neutrality with no edge, this may be one indicator that can guide here. I rarely use it because it is so overplayed in the financial press, but there are times when it works well as a guide. And this could be one of those times.

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