Value of Perfect Information

What becomes more dangerous when it is above 26, and less dangerous when it is below 26?

The answer is the Volatility Index (the VIX) which is often called the the Fear Index.

What some investors may not be aware of, is the importance of 26 on the VIX.   It so happens that many Institutional investors initiate what are often referred to as “program trades” when the VIX rises above 26.

What is a program trade?   It is a term that describes a situation where baskets of stocks are traded all at the same time, and the event is triggered by the execution of a computer program.   Sometimes, these are block trades with a total value of over a million dollars, that are executed on the New York Stock Exchange.

The impact can cause unusual swings in volatility which carries a higher than normal exposure to risk levels for smaller investors.

Since program trades typically increase after a value of 26 on the VIX, then below 26 would be a quieter, safer place to be when trading long positions.

Take a look at the two year chart below. where you can see the correlation between the S&P and the VIX when the VIX was above or below 26.  It is not a trader’s magical tool, but it can alert an investor when he is in a territory where volatility and whipsawing can be exceptionally high.

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DO chart with unfilled volume gap (at 51.89) , moving averages & fibs.

One indicator I look at intra-day to day trade is TRIN! Like stealing candy from a baby! .. especially with TRIN taking a nose dive with market rising .. a sure tell of the market rise to continue for a few minutes and up to ten minutes..

Watch the Declining Volume for hints of what the market will do …

Market technicians look at a lot of data, and sometimes seldom watched data like the Declining Volume on the New York Stock Exchange can become very important.

This morning, we will focus on only one type of formation on the DVOL and how it relates to a market bounces.

The market is very seldom in a state of true balance, and it is the degree of imbalance that often sets up buying opportunities for investors.

Take the NYSE’s Down Volume for instance (symbol: DVOL).   In today’s chart, we inverted our data so it would track with the NYA Index’s direction.

However, if you look at labels 1 to 3, you can immediately see three instances where the NYA Index did NOTtrack with the DVOL’s trending.

In each of those three instances,  the NYA Index went down, while the inverted DVOL went UP or Sideways.  In other words, the opposite behavior of the Down Volume was trying to tell you something.

If the market was going down while the Down Volume was becoming less, then you would have to think that the amount of selling was starting to decrease and dry up.

That pretty much describes a positive divergence condition that was going on between the DVOL and the NYA Index at labels 1 through 3.

Comments: The best divergences often occur when the NYA Index has gone so low, that it falls below its lower Bollinger Band.   That is an out of balance condition that needs to go back towards normality by re-entering the Bollinger band area.

When such a condition occurs, with a positive divergence coming from the inverted Down Volume, then an oversold condition is ready for a bounce.  That is what we had a label 3 this week as seen on today’s chart, posted everyday on www.StockTiming.com’s Advanced Update.  There was not a lot of divergence occurring at label 3 in terms of “length of time”, or the “rise on the slope”, so it is very likely that this divergence will not have the impact that label 2′s divergence had on the market.

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