Are Technical Indicators Such as the VIX a Reason to Get Involved with a Stock?
Once in a while the technical indicators start making news. Whether it's the VIX, or a moving average, someone picks up the story and soon it's on CNBC or Bloomberg as the news of the day. So, as an investor one has to ask, "are technical indications really a reason to buy or sell?" In some respects the answer is no, since "investing" is something different from swing trading or day trading. Let's suppose you are in the same camp as we are and you think the long term outlook on gold is very positive. So, each time it dips below a certain value level, you add more to your portfolio, basically "buying on the dips". This might be quite different from someone else who looked at a roll over as a reason to sell out. Yet, both traders are looking at the same technical levels. It's very true that the market pays a lot of attention to technical levels. We can show you chart after chart, breakout after breakout, bounce after bounce where the only thing that made the difference was a line drawn on a chart. Moving averages for example are perfect studies in when large blocks of money will buy or sell. Watch the action surrounding a 200 day moving average and you will see first hand the warfare that takes place as shorts try and drive it under, and longs buy for the bounce. It's neat to watch. The question of the day is this " Are technical indicators such as the VIX a reason to get involved with a stock (or an average) because of what it says?" The answer is definitely maybe. Sorry, we know you were looking for more than that, but the fact is it's a maybe, nothing more. If this market has taught you anything, it's that it can do things that don't appear rational, and do it for a lot longer than you would have suspected. When the VIX dipped below 20, everyone was looking for the reaction that "always" comes. Guess what? No reaction. We were asked last week if we put much faith in the VIX. Our response is the same as it's been for all the technical indicators. Use them as a tool to help adjust your view of everything that is going on, but don't base your actions on any one of them by themselves. Sure it's true that an oversold indication will often lead to a bounce, but when? If something has become oversold, then it makes sense that at some point it fell from "balanced" to oversold right? Right. Well why didn't it bounce when it became "balanced?" Again, because things often take time to correct. The VIX, Arms, moving averages, stochastics, DMI's, and all thirty five or so indicators are useful tools that help us try and find places to move money. But not a one of them is actually accurate enough to base your trades on. What you really want to do is get several of them pointing in the right direction at the same time. That is fairly rare, but when it happens, the chances of success are greatly enhanced. Just because the VIX might be making headlines, and could even become self fulfilling as everyone focuses on it, it's still just one indicator out of many and putting all your eggs in one basket is dangerous.
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