Where’s the Market Heading?

Stocks are attracting some buying at this time, but I expect to continue to see some selling pressure should markets move higher. This is because the risk continues to be high, so there is little incentive.

The decline in oil is helping stocks, but there is still a sense that the upside may be limited in the near term.

A technical indicator I like to look at is the volatility readings from the CBOE.

The CBOE NASDAQ Volatility Index or VXN — a barometer of near-term market volatility based on NASDAQ 100 index option prices — is generally viewed as a contrarian indicator. A high VXN indicates maximum fear and a possible market bottom. A low VXN indicates reduced apprehension and a possible market top.

The five-day VXN to August 13 fell to 24.41 from 26.19 the previous week. The VXN readings have been declining in recent weeks, which indicates a potential near-term top on the NASDAQ.

We are also seeing the same type of readings in the CBOE Volatility Index or VIX, a barometer of near-term market volatility based on the S&P 500 index option prices. The five-day VIX to August 13 fell to 20.67 from 22.27 the previous week. The recent trend of lower VIX readings could indicate a near-term top.

These technical readings are meant only to help analyze the condition of the market, but they are pretty good as far as giving us reliable readings of direction.

Over the next few weeks, watch to see if stocks can break higher. The NASDAQ has broken above its 200-day moving average and is showing a bullish double bottom, while the Russell 2000 is also attracting some buying and is inching towards breakeven on the year.

I expect trading will continue to be driven by headlines and pressured by profit taking after rallies.