Once in a while the technical indicators begin making news. When 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 must ask,»are specialized indications a reason to buy or sell?» In certain respects the answer is no, because»investing» is something different from swing trading or day trading.
Let’s suppose you’re in exactly the same camp as we are and you believe the long term outlook on gold is quite positive. So, each time it drops below a certain value level, you add more to your portfolio, essentially»buying on the dips». This may be quite different from somebody else who seemed at a roll over as a reason to sell out. However, both traders are taking a look at the identical technical levels.
It is very true that the market pays a whole lot of focus on technical levels. We can show you chart after chart, breakout following breakout, bounce after bounce where the one thing that made the difference was a line drawn on a graph. Moving averages by way of instance are ideal studies in when large blocks of money will buy or sell. Watch the activity surrounding a 200 day moving average and you’ll see firsthand the warfare that happens as shorts attempt to push it and longs purchase for the bounce. It is neat to watch.
The issue of the day is that this» Are technical indicators like the VIX a reason to become involved with a stock (or an average) because of what it says?» The solution is definitely maybe. We know you were searching for more than this, but the simple fact is it is a maybe, nothing longer. Whether this market has taught you anything, it is that it may do things that don’t seem fair, and do it for much longer than you’d have suspected. When the VIX dipped below 20, everybody was searching for the response that»always» comes. Guess what? No reaction.
We were asked last week if we place much faith in the VIX. Our answer is the same as it has been for all of the technical indicators. Use them as a tool to help correct your view of everything that’s happening, but do not base your activities on any one of these . Sure it is true that an oversold indication will frequently result in a bounce, but when? If something is now oversold, then it makes sense that at any stage it dropped from»balanced» to oversold right? Right. Well why did not it bounce when it became»balanced?» Again, because things often take time to fix.
The VIX, Arms, moving averages, stochastics, DMI’s, and all thirty five or so indicators are useful tools which help us attempt to find areas to move money. But not a one of them is really true enough to base your transactions on. What you really need to do is get several of them pointing in the right direction at exactly the exact same time. That’s somewhat rare, but when it occurs, the odds of success are greatly improved. Just because the VIX may be making headlines, and might even become self satisfying as everyone focuses on it, it is still only 1 index out of many and placing all your eggs in 1 basket is dangerous.