Read Larry Connors' blog – Short Term Trading Strategies
| TradingMarkets.com
Stocks ended a quadruple witching trading session on Friday largely flat. The Dow and S&P 500 are now both down three days in a row.
Less discussed in stock’s three-day slide is the fact that the decline has occurred as volatility has continued to pull back. One of the most effective ways to measure volatility was discovered by Larry Connors, who showed how using a dynamic analysis of the VIX or CBOE Volatility Index, can help inform traders when stocks are more likely to move higher in the near term and when they are more likely to move lower.
Specifically, Larry found that when the VIX is stretched above its 10-day moving average by 5% or more, it tends to mean that there is an extreme amount of panic in the market. In such situations, stocks are likely to be oversold and tend to outperform over the next few days.
By contrast, when the VIX is stretched below its 10-day moving average by 5% or more, it often reflects a growing complacency – if not outright greed. When the VIX is in this position, stocks are likely to be overbought and tend to underperform in the near term.
The key insight was the use of a dynamic tool like the moving average rather than a static level. This allows for accurate VIX analysis even in instances when the VIX moves into extreme territory.
Over the past few weeks – and particularly over the past few days – the VIX has declined significantly. In fact, over the past five days, the VIX has fallen by more than 20%. Perhaps more importantly, however, is that the VIX is now clearly more than 5% below its 10-day moving average. This suggests that stocks are increasingly likely to underperform in the near term.
Our Top 25 PowerRatings stocks look pretty much they way they have over the past few days – with the noted exception of there being no short/inverse ETFs with PowerRatings of 8. This too reflects the relative lack of opportunity in the market right now.
That said, of the stocks from yesterday’s column, both Laclede Group Inc. (LG | Quote | Chart | News | PowerRating) and Questcor Pharmaceuticals Inc. (QCOR | Quote | Chart | News | PowerRating) with Short Term PowerRatings of 8, remain among the better opportunities for those looking for stocks that are likely to outperform the average stock over the next few days.
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