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Tuesday’s VIX Action Signals Panic Selling And Lays Groundwork For New Trading Pattern – Mike Swanson

I don’t have to tell you that the stock market had a morning collapse yesterday, because it fell so much that it actually made the regular news and on Google trends was the top story in the United States. The Nasdaq was down at one point on Monday 4.9% This was the first time since 2008 that it was down more than 4% and came back to finish green for the day.

Now the market actually ended up coming off of the lows of the day to close green and bring some hope. The DOW at one point was down 1,115 points and closed up 99. Take a look at this chart of the DOW.

So, at first glance this looks like a “key reversal.” And what is more the VIX “fear index,” which measures the premiums that traders pay for volatility, surged all the way up to 39.

This type of VIX action signals panic selling and typically signals a stock market bottom.

There is one problem, though, and it’s a big one.

In bull markets when the VIX does what it did yesterday the stock market typically rallies for months and the VIX falls back down below $20.00. It typically takes at least six months, and sometimes over a year to see the VIX get above 30 again.

But the VIX was just above 30 in early December!

This means that this is not a bull market anymore, which sees temporary VIX spikes, but one now marked by a huge increase in stock market volatility.

That is one of the defining features of a bear market.

If you want to buy look only at the things that barely fell yesterday when the market was down or actually were up.

That means think gold.

All the popular fad stocks are completely broken and now even the leader stocks of the last bull market are too.

Look for example at Amazon.

Amazon was one of those “FANG” stocks that helped the S&P 500 and the Nasdaq go up for years and even continue to act strong last year while the internals of the market faded. Now it is a broken stock too, having been crushed in the past month. It’s trading so far below its 200-day moving average and even its lower 200-day Bollinger Band that it is going to take a long time for it to get back above those levels. It’s now going to be a dead money situation like so much of the stock market for awhile. When the bull market leaders – the generals – get shot then you are in a bear market.

That said, the price action of the averages does make it look like a bounce at least into this Wednesday’s Fed meeting is likely or a rally afterwards.

What happened yesterday, actually reminds me of a market day way back in April of 2000 that happened right as the internet stock bubble started to bust. Look at this circled day, as it is one I will never forget.

That is how the stock market topped and rolled over in the Spring of 2000.

On that circled day I remember driving in the car and hearing people talk about the market collapsing on the radio and then it came back on the close and everyone called a bottom when I get back home on TV.

I’m not saying that it is going to trade exactly like it did that April and May, because when the market is this volatile you have to judge it day by day.

The key takeaway here is that the fact that the VIX went above 30 in early December and just got back above it again so quickly means we are in a highly volatile market. The VIX doesn’t get back above 30 so soon in a bull market.

That’s why I had no interest in trying to buy yesterday even with the VIX that high and the market rallying on the close.

The next trading pattern I’m referring to in the title of this post is a year of high stock market volatility. This is not going to be a year in which the market has one 10-20% correction and goes up the rest of the year slowly. It’s going to be a roller coaster, with wild and extreme swings with a close at the end of the year likely lower than where it opened at this past New Years.

People will focus on the big daily gyrations, but as I wrote yesterday, the thing to do is to focus on the few pockets of strength.

Gold went up 0.64% yesterday and barely was down at all yesterday morning when the DOW was down 1,000 points. The market is gapping down as I write this before the open and gold is down $4.00. and the DOW futures are down 200.