(If you’re unsure what the VIX is, check out this explanation here.)

As you can see in the chart above, the VIX formed a support line at around 40.

This is a very important line because it hasn’t been breached since late September – just after the Lehman fiasco.

Considering the VIX index measures fear, a break under it would symbolize a less fearful and volatile market. And less volatility correlates perfectly with higher stock prices.

So if you want to be extra safe before buying stocks, wait for the VIX to break under 40 before jumping in.

But to the people I talk to in the checkout line at the supermarket… at Target… at the gas stations… in bars… don’t seem particularly worried either.

Not anymore than usual, that is.

I even checked the S&P 500 Volatility Index ($VIX).

This is known as the “fear index,” since the more fearful the market is the higher it moves.

What did the VIX tell me?

It said that, although there is some fear out there, it’s nowhere near last November’s levels.

In fact, it’s not even over January’s levels.

Yet here we are.

The Dow has broken UNDER its November lows (as I predicted it would here and here).

And the market isn’t even in a panic.

This means that the Dow Jones is likely to fall further and the S&P and Nasdaq should follow.

That’s because true market bottoms don’t happen unless there’s a lot of fear. Everyone has to be sick of stocks to never want to invest in them again.

And that’s simply not the case today.

So until the VIX back to it November levels, you can expect the market to keep dropping.

My target range is 6,750 to 6,500 (since this is a small percentage move from where the Dow is now, options are the best way to play it and make a substantial profit).

The trade of the year continues to be the trade of the year: bet on falling stocks and make big bucks.

We knew it was going to happen. Heck, we had the canary in the coal mine, the volatility index, investor sentiment, and a host of other technical indicators all screaming it was time to get defensive. And the screams came just in time…

Last week, the Dow Jones Industrial Average, the Nasdaq Composite Index, and the S&P 500 all lost about 3.5%. The semiconductor index was down about 5%. Retail and financial stocks fell more than 6%. Brokers lost 7%. And homebuilders gave up 10%.

The bad news, of course, is it’s going to get worse.

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Here’s another look at the monthly chart of the S&P 500 plotted against its 20-month exponential moving average (EMA)…

If the S&P 500 is trading above the line, then stocks are in a bull market. If stocks are trading below the line, then the bear is in charge.

Stocks entered a bear market back in December. The S&P 500 declined for five straight months, and then put on a blistering two-month rally.

Today, the S&P is back up near the line. If history is any sort of a roadmap, then investors are in for a very long summer.

Take a look at what happened in the last bear market. Stocks broke down, rallied back up, and challenged the line… then cascaded lower again.

Get ready for the cascade.

Of course, stocks don’t go straight down. After such a nasty beating last week, stocks should enjoy a brief bounce higher early this week. In fact, the odds look pretty good that we may see the S&P rally back up and test the EMA at about 1,407.

At that point, though, traders ought to look at exiting long positions and adding on a few short sales.

Best regards and good trading,

Jeff Clark

Source: Warning: Trouble Ahead

Of course, it’s hard to say for sure the market has peaked. But enough technical indicators are flashing warning signs that it makes sense for traders to be a bit cautious…

Shares of Merrill Lynch are underperforming. Investor sentiment is as positive as it’s been all year. The put/call ratio is falling. And the talking heads on CNBC are once again registering high on the “giddiness” scale.

And then, there’s this chart…

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This is a chart of the Volatility Index. It’s a measure of the premium investors are willing to pay to purchase options on the S&P 500.

A rising VIX indicates investors are growing more fearful of a potential downside move and are willing to pay up to buy protection via index puts. A declining VIX displays increasing investor complacency.

The VIX is best used as a contrary indicator. Indeed, the stock market often bottoms just as the VIX peaks, and vice versa. In other words: “When the VIX is high, it’s time to buy. When the VIX is low, it’s time to go.”

Yesterday, the VIX closed at the lowest level of 2008. Worse yet, you can see the chart is tracing out a bullish falling-wedge formation. These patterns typically break out to the upside. And that spells trouble for the stock market over the short term.

No single technical indicator is correct all of the time. And it’s foolish to move all in or all out solely on the basis of technical analysis. But I think these warning signs justify a bit of caution right now.

Best regards and good trading,

Jeff Clark

Source: This Bullish Chart is Bearish for the Market

Despite the worst monthly cut in US payrolls in five years, US stock market indexes were poised for increases of 3% to 5%, according to Dow Jones Market Watch.

The gains come ahead of next week’s round of earnings estimates.

The Dow Jones industrials are up 24.59 points to 12,650.62, a weekly gain of 3.6%. The boarder S&P 500 is 4.7% north of where it stood one week ago.

“The one indicator to watch right now is the the Volatility Index,” says Jeff Clark in The Growth Stock Wire.

“This measures the implied volatility factored into the price of S&P option contracts. In simple terms, it’s a measure of fear. When traders are afraid of losing money in stocks, they’ll often pay up to buy protection in the form of index put options. The increased demand for puts inflates the option premiums… and the VIX rises.”

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