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The struggle between the bulls and bears continued on Friday with what appeared to be a victory for the bears. And, long-term, they do have the edge since there is little doubt that every major index is still pointing south.
Friday's close at 8,001 on the Dow surely got the bulls' attention, as 8,000 appears to have some psychological importance to the investing public. But it has little technical significance.
The support line that has held since November (with the exception of the bear trap of Nov. 20 and Nov. 21) is actually at around 7,940. And the numbers that most technicians refer to as "the" market's support is at the zone between S&P 500 800 and 820.
For guidance at crucial moments, I prefer to check out the most reliable internal and sentiment indicators.
Our internal indicators are at an oversold status, with momentum in an extreme oversold area. But on Friday, the slow stochastic issued a sell signal suggesting a brief near-term pullback.
As for the sentiment indicators, the numbers that measure public sentiment are showing extreme fear, while insiders continue to load up on stocks -- and that is good.
One indicator that is a bit perplexing is the CBOE Volatility Index (VIX), which closed at 44.84 on Friday after an intraday low of 33.48 on Wednesday. This seems low compared with the recent numbers of 96.40 on Oct. 26, 81.26 on Nov. 20, and 57.36 on Jan. 20.
Should we expect the VIX to be at a higher number and showing more "fear" than it does now at the currently critical support area?
If so, the question is: What is the significance of this week's low VIX? Is it less fear or, perhaps, something else?
I think the key to understanding the VIX comes from a study of the past.
The triple-bottom-making process of the last bear market produced the following readings:
• 48.46 on July 21, 2002
• 43.09 on Oct. 11, 2002
• 34.40 on March 4, 2003
Notice not so much the level of the VIX at critical support areas, but that at each key bottom the VIX was declining just like the last three VIX numbers of this bear market, and that the final number at 34.40 is even lower than the current one.
I believe that the reason for declining VIX numbers is not so much less fear, but of an increase in total capitulation. And capitulation is the final emotional phase of a bear market -- we may be at the bottom now and the VIX could be telling us that.
Long-term investors may want to consider my trade of the day, Corinthian Colleges Inc. (NASAQ: COCO).
Sam Collins is a contributor to OptionsZone.com.
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