As an investor, you know that, as the VIX trends down, the market moves up ... so its trend is very important.
The VIX (Volatility Index) has made historic lows ... but, what will it do in the future?
Will it remain low, or start a new, longer term trend up? A new longer term trend up would correlate with the inverted yield curve, suggesting that there is a good probability of an up coming recession.
Some weeks ago, I did a research project on the VIX with a multitude of trending tools.
One interesting outcome, was the following chart below.
What it shows, is that the VIX has been following a concentric circle pattern over the past few years. The chart has 3 rings ... the bottom two are the resistance bands for the VIX.
The lowest, green band has been hit 5 times during this period, and each time, the VIX immediately went back up and the market down.
The "long term" concentric circle cycle has hit the bottom ... and the bottom resistance level will now start rising as we progress into the year. In 2007, the bottom side resistance will accelerate to the upside and put more downside pressure on the market. This concentric pattern would fit with the increasing chances of a recession as depicted by the yield curve.
While this model is not meant for short term trading purposes, it does gives us a look into what the longer term picture of what the market might look like for those who plan further into the future.
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