Volatility Index: Another Ominous Sign For Stock Prices

The Volatility Index (^VIX) is pointing to another 1,000-point move.

The Volatility Index (aka the “VIX”) is best used as a fear barometer. A rising VIX shows increasing fear among investors. It’s commonly associated with declining stock prices. A falling VIX, on the other hand, indicates investors are less fearful and more willing to take risks. It often leads to rising stock prices.

The last time we looked at the volatility index, it was on the verge of breaking down through major support on the chart. We surmised that if Wall Street’s fear barometer dropped below 39, it would kick off a 1,000-point rally in the Dow Jones Industrial Average.

The VIX did indeed break down, and the Dow - which was trading around 7,600 at the time - rallied as high as 8,800.

Today, the VIX is giving us another signal. This time, it’s going in the other direction. Take a look…

Last week, the VIX broke out of a falling-wedge formation. It rallied up to resistance at 33 and then turned back to retest the breakout level. Now, it’s on its way back up again.

If the Volatility Index can push above 33, it’s a straight shot up to 39 - perhaps even as high as 46. Since a rising VIX indicates increasing levels of fear in the market, and increasing fear is typically caused by falling stock prices, this chart is a bad omen for the market over the next few weeks.

Of course, it’s just one more bad sign in a sea of bad signs we’ve covered lately. This one, though, may be indicating a 1,000-point drop.

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