VIX NEARS UPSIDE BREAKOUT -- SHORT TERM MARKET CORRECTION CONTINUES AS DOW AND S&P 500 HEAD TOWARD 200-DAY AVERAGES -- RISING DOLLAR WEAKENS COMMODITIES AND MULTINATIONALS -- STOCKS COULD PULL BACK TOWARD MIDDLE OF YEARLONG TRADING RANGE
VIX MAY BE TURNING UP ... Chart 1 shows the Volatility (VIX) Index trying to clear 17 for the first time since early March. A rising VIX is usually associated with lower stock prices. Chart 2 shows a point & figure version of the VIX and shows a similar picture. After rising above its falling 45 degree resistance (red) line, the VIX needs to touch 17.50 to achieve an upside breakout. That means that option traders are buying puts as a hedge against lower stock prices.
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Chart 1
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Chart 2
DOW AND S&P 500 HEADED TOWARD 200-DAY LINE... Charts 3 and 4 show the Dow Industrials and the S&P 500 trading below their 50-day averages and headed toward their 200-day averages. That will be a big test of their current uptrend. Chart 5 shows the Nasdaq Composite already below its moving average lines. Last Thursday's message warned that the failure of the Nasdaq to exceed those two lines could put the uptrends in the Dow and S&P 500 in jeopardy -- "NASDAQ FAILURE THREATENS UPTRENDS IN DOW AND S&P 500".
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Chart 3
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Chart 4
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Chart 5
BOUNCING DOLLAR IS PART OF THE PROBLEM... Chart 6 shows the PowerShares Dollar Index Fund (UUP) trading at the highest level in a month and above its 50-day average for the first time since early March. That causes a couple of problems. First, a rising dollar is pushing commodity prices lower and stocks tied to them -- like energy and metals. Second, a rising dollar creates problems for large multinational stocks that rely on export business. Yesterday's surprisingly hawkish Fed minutes has also rattled the market over the short run. No major damage is being done so far. I suspect this is a normal pullback in the major stock indexes from the top of their yearlong trading range. A pullback to the middle of that trading range wouldn't be a big surprise.
