VIX May be Signaling Profit-Taking Ahead

We just saw one of the most violent reversals up in the fear index in memory

By Sam Collins, InvestorPlace Chief Technical Analyst
VIX Chart

Technology stocks led the market lower on Monday despite a new all-time high for Apple (NASDAQ:AAPL) of $683.29, which then reversed and ended the day down 2.6%. Google (NASDAQ:GOOG) approached its all-time high of $714.87, but it too reversed and closed down 0.8%.

One reason for the afternoon sell-off was a change in direction for consumer credit. The Fed announced that the much-followed indicator fell by $3.3 billion in July, well below economists’ forecasts of an increase of $10 billion.

At Monday’s close, the Dow Jones Industrial Average was off 52 points at 13,254, the S&P 500 fell 9 points to 1,429, and the Nasdaq was off 32 points at 3,104. The NYSE traded 615 million shares and the Nasdaq crossed 361 million. Decliners topped advancers by 1.5-to-1 on both the NYSE and Nasdaq.

VIX Chart
Click to Enlarge

The CBOE Volatility Index (VIX) had a 14% reversal from low to closing high, indicating that the summer’s lethargy may be coming to an end. This is one of the most violent reversals up in the index in memory and could be telling us that a round of profit-taking is taking shape.

UUP Chart
Click to EnlargeTrade of the Day Chart Key

The PowerShares DB US Dollar Index Bullish Fund (NYSE:UUP) may have experienced a selling climax and reversal similar to the one seen in October 2011 when a high-volume gap signaled the termination of an intermediate downturn in the U.S. dollar.

EZU Chart
Click to Enlarge

The dollar’s reversal up is reflected in the turndown from the $31-$32 zone for the iShares MSCI EMU Index ETF (NYSE:EZU), a basket of stocks from 11 European countries.

SPX Chart
Click to Enlarge

Monday’s reversal may not appear serious, but the inability of the S&P 500’s Relative Strength Index (RSI) to hold above the line drawn from the February high is a negative development.

Conclusion: On Thursday, with one final burst of energy, stocks may have hit a temporary top. The anticipation of the Fed announcing another easing program this Thursday appears to have been discounted by the recent jump in stock prices. Thus, if they announce a program, stocks will likely fall, and if they fail to embark on a new round of easing, selling could be fierce.

Added to that uncertainty are the many economic and political imponderables around the world, and so there appears to be enough incentive for traders and investors alike to nail down some profits.

And if the UUP dollar index has had an upside reversal similar to that of Oct. 28, 2011, then precious metals traders should also consider taking some profits.

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.

Article printed from InvestorPlace Media,

©2018 InvestorPlace Media, LLC