Could Nasdaq VIX ‘Saucer Break down’ Lead to Waterfall Decline?

The Nasdaq VIX is ‘climbing up saucer support.’ This pattern is quite rare, but has some prominent precedents: Silver and gold in 2011 and Apple in 2012. Could a Nasdaq VIX ‘saucer break down’ lead to a similar decline?

When it comes to VIX instruments, the S&P 500 VIX gets all the attention, while the Nasdaq-100 VIX (VXN) is treated like the ugly duckling.

Right now the ‘ugly duckling’ VXN chart looks more interesting than the S&P 500 (NYSEArca: SPY) VIX.

  • Since mid-November VXN has been in a steady up trend.
  • Since the beginning of the year, VXN is climbing along bowl or saucer-shaped support.
  • Resistance at 22-24 has capped every VXN rally.
  • From November – March the VXN has rallied alongside the Nasdaq-100 (Nasdaq: QQQ).

In the technical analysis universe, the bowl-shaped support is quite rare and the actual support level is harder to pinpoint than straight trend line support.

Nevertheless, I’ve seen three asset classes ‘climb up the saucer’ before and tumble thereafter. Silver in April 2011, gold in September 2011, and Apple in April 2012 (see chart below).

Gold, silver and Apple climbed up the saucer during the late stages of a bull market frenzy. VXN’s rally has been short and comparatively tame, therefore VXN’s reaction to a saucer breakdown may be much more subdued.

This is one of those formations that doesn’t jibe with the majority of my indicators right now. Most of my indicators are suggesting that risk is rising. The Nasdaq for example may be crafting the right shoulder of a bearish head-and shoulders formation, but a VXN break down would translate into a higher Nasdaq.

Datapoints like this remind us to never be complacent. On April 14, when the S&P was at 1,820, I wrote an article titled “This Might be the Only Bullish S&P 500 Chart Right Now,” and we now know that this chart prevailed over many bearish indicators.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Nasdaq VIX Soars to 5-Year Extreme

Investors may not be aware that there is a VIX volatility index that measures expected volatility (and fear) for the Nasdaq-100. Currently, investors fear a Nasdaq breakdown much more than an S&P 500 breakdown. In fact, fear is at a 5-year extreme.

Here’s an intriguing phenomenon: Since March 14, the S&P 500 VIX (Chicago Options: ^VIX) dropped 19.1%. The Nasdaq-100 VIX (VXN) lost only 4.2% (see first chart).

VIX vs VXN

Since March 19, the S&P 500 VIX is down 4.7%, while the Nasdaq-100 VIX is up 11.5%.

Just like the S&P 500 VIX, the Nasdaq VIX is a measure of expected near-term volatility.

This short-term divergence suggests that investors are more concerned about a possible Nasdaq (Nasdaq: ^IXIC) breakdown than an S&P 500 (NYSEArca: SPY) breakdown.

But is this diverging of expected volatility significant?

To make the divergence between the VIX and VXN easier to visualize I’ve calculated the VXN/VIX ratio.

VXNVIXR

The VXN/VIX ratio just spiked to 1.26, the highest reading in 2014 and 2013. In fact, 1.26 is a 5 ½-year high.

We haven’t seen too many extremes in the past few weeks, so I wanted to see what effect large VXN/VIX spikes (basically a ‘risk off’ signal) have on the S&P 500 (and Nasdaq).

The conclusion is quite enlightening. A chart plotting the VXN/VIX ratio against the S&P 500 (going all the way back to 2006) along with what it means for stocks going forward was featured in yesterday’s Profit Radar Report.

A more detailed short-term forecast is available here (for free): S&P 500 Short-term Outlook

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.