The VIX hit almost unheard of highs on Friday 10/24 at 89.53 and has since retraced to close at 59.89 on Friday 10/31.  The volatility index formed a “Hanging Man” candlestick pattern on Monday 10/27 at the top of the range and has been dropping.  Friday 10/31 ended in a narrow range trading day with a “Spinning Top” type pattern.

I point this out to you because, the hallmark of this October has been historical swings in the market with huge triple digit moves in both directions.  This type of market is very hard to predict because it is news driven and irrational.  As the VIX begins to fall, we will start to see a return to markets that are more focused on fundamentals and value.  I have taken this opportunity to purchase beaten down “bellwether stocks” that are trading at multiples not seen in years.  When rational behavior returns, these stocks will regain their true value.  In the meantime, I am further reducing the cost basis of these stocks with options.

I mentioned last week that I anticipated that “The Train” would be leaving the station in a massive bullish move, which happened on Tuesday.  These types of moves require that you board early, and I did.  The remainder of the week, we got some follow through on that move.  However, I feel that we have some immediate resistance at 9500-9800 in the DOW and 1010-1020 in the SPX.  I still feel we are in a range until we break through those levels.  The channel in the DOW, as mentioned here in my blog two weeks ago, was 7900-9500.  I feel that the range has narrowed to 8140-9500.  I believe as the volatility begins to come back to more reasonable levels, we will begin to see narrower range trading sessions interspersed with fewer triple digit days.

I still anticipate a bullish move through the end of the year with a target of 11000-11500.  There is strong resistance at 10500 and that could be a stumbling block.  The SPX should go to 1150-1250 with resistance to overcome at 1100.  Longer term, it will be a rough ride moving into 2009.  There are many wounds in the economy that need to heal so I see a sideways to bearish market with occasional bear market rallies.  Best, Robin

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