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What’s Lurking in This Market?

High VIX indicates violent selling could occur if investors are hit with bad news


On Friday, stocks tumbled on higher volume as investors ignored the Obama jobs plan and focused onGreece’s possible default, the resignation of a key German official from the ECB, and a headline that suggested thatGermanymay back certain banks in the event of a default.  The German DAX index fell 4%, and the U.S. dollar gained 1.2% against the euro whileU.S.stocks fell by about 2.6%.  The S&P 500 turned in its fifth loss in six sessions and its sixth weekly decline in seven weeks.

VIX Chart

The CBOE Volatility Index (VIX), sometimes referred to as the “fear index,” climbed to an intraday high of 40.74. It may not be as high as the August high of 48, but it’s still high enough to indicate that investors are scared enough to react with violent selling if more unexpected trauma hits the markets again.

SPX Chart

Trade of the Day Chart Key

Technically the S&P 500 and its companion indices are at a critical point with Friday’s intraday low resting on the support line of the bear flag that began to form in early August. Stocks usually rally from support lines, and they may rally now, but when they do turn, look out below.

A break under 1,140 and then the Aug. 9 reversal low at 1,101 would almost certainly drive stocks deeply into last summer’s trading range with its low at 1,110 and support at 1,040. And even more importantly, it would confirm that a bear market downtrend line that connects the late July high with the late August high is valid. Further, the Relative Strength Index (RSI) of the S&P 500 is neutral but in decline and appears poised to break its recent lows.

News that could turn markets could come from the financial sector. Barclay’s Capital is hosting a financial conference that could reveal more of the bank’s need for capital and legal actions related to its mortgage problems. Also, the Fed is expected to engage in further monetary “easing” via a “twist,” i.e., a move to sell near-term maturities and buy longer-term bonds (please don’t ask me why). And also look for any adjustment of earnings forecasts, up or down, by the major banks.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

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