To The Moon

Piercing and Bullish Engulfing Candles Across the Board - The VIX is Still Overheated

This past week was likely one of the most volatile many investors will ever witness. If you navigated it, take pride in that, because intense periods like these offer unparalleled learning opportunities across several crucial aspects:

1. Recognizing Euphoria and Trusting Technical Warnings: Next time, you'll be more inclined to act on sell signals despite optimistic market noise suggesting imminent new highs. You'll remember the technical warnings, such as the ones I highlighted as early as December, and the subsequent confirmations in February, even when the initial market declines were minimal.

2. The Indispensable Role of Stop Losses: You'll appreciate the critical importance of setting stop losses. These automated orders remove the emotional burden of making difficult sell decisions during turbulent times, protecting your capital. This is precisely why I provide multiple levels, including a central one that serves as crucial insurance against both bearish and bullish reversals (if you're in a short position).

3. Avoiding Capitulation at Oversold Extremes: You'll learn the danger of capitulating when technical indicators reach extreme oversold levels. Often, these points precede significant bounces, and selling at the absolute bottom locks in losses unnecessarily.

4. Questioning Broad Statistics: You'll be more discerning about relying on general statistics, such as the often-cited "SPX is higher one year later 70% or 80% of the time." You'll understand the crucial point: the SPX tends to be positive in approximately 80% of years anyway, so a statistic below 90% doesn't offer a significant edge or capture the nuances of bear market recoveries.

5. Enhanced Emotional Awareness: You'll have a deeper understanding of your own emotional responses and how to manage them during turbulent market conditions.

So, what made this past week truly unique? Let's examine two key indicators. First, the $Cboe Volatility Index(VIX)$ , or volatility index, surged to 60, reaching extremely overbought conditions and remaining there. To provide context, during the 2022 bear market, the VIX peaked at a significantly lower 39, and in 2018, it reached 50. Even during the 2000 dot-com crash, the VIX did not exceed 50 between 2000 and 2002. While higher VIX levels are possible, as seen in 2008 (89) and 2020 (85), disciplined technical analysis suggests a temporary peak is now in place.

The second indicator that made this week unique is the Average True Range, which is a technical analysis indicator that measures market volatility. Unlike indicators that show price direction, the ATR solely reflects the degree of price fluctuation over a specific period. A high ATR value indicates high volatility, meaning prices are moving significantly up or down. Conversely, a low ATR value suggests low volatility, with prices trading within a tighter range.

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