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(1/27/07)
The Volatility Index (VIX) dropped below 10 for the third
time since late November on Wednesday (point A) which was then followed by a
sharp sell off on Thursday. In addition the last two times the VIX
dropped below 10 (points B) this was also followed by a drop in the S&P 500
(points C to D and E to F). At this time it's hard to say whether
this will turn into an extended pullback like occurred from mid December through
early January (points C to D) or whether it will be immediately followed by
another move higher like occurred from late November through mid December
(points F to C). 
Meanwhile as I talked about in late
December the VIX came very close to an all time low in the middle part of the
month which occurred in late December of 1993 (point G). 
As you can see below the VIX reached its all time low at 9.31
(point H) in late December of 1993 just before Christmas this was followed by a
brief correction in the S&P 500 the week after Christmas (points I to J).
Meanwhile after this brief correction the S&P 500 then rallied through
late January of 1994 (points J to K). However the S&P 500 then peaked
in late January which was then followed by a substantial sell off from February
through March of 1994 (points K to L) in which the S&P 500 dropped around
10%. Also notice that the VIX didn't drop back to its previous low (point
H) as the S&P 500 peaked in late January.
The current pattern in the VIX and S&P 500 look rather
similar to that from late 1993 into early 1994 so I still believe we may have to
be on the lookout for a possible multi week correction during the February
to March timeframe.
As far as the major averages here
are some key support level to watch during the next few weeks. The Dow has
an important support level at its 50 Day EMA (blue line) just above 12360.
If the Dow can hold support at its 50 Day EMA in the weeks ahead then its rally
from the mid July low will remain intact. However if the Dow were to break
below its 50 Day EMA then that could lead to an eventual drop back to its 200
Day EMA (green line) which is nearing the 11800 level. 
The
Nasdaq so far has been holding support near its 50 Day EMA (blue line) but the
important support level to watch over the next few weeks is just above
2390. If the Nasdaq were to break below the 2390 level then this would
likely lead to a drop back to its 200 Day EMA (green line) which is approaching
the 2320 level. 
As for the S&P 500 it still
remains above its 50 Day EMA (blue line) which is currently around the 1410
level however the more important support level to watch in the weeks ahead is
just above the 1400 area. As long as the S&P 500 can hold support
above the 1400 level then the rally that began from the June low will remain
intact. However if the S&P 500 were to break below the 1400 level then
this could lead to an eventual drop back to its 200 Day EMA (green line) near
1345 in the longer term. 
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