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By Lawrence G. McMillan

The CBOE’s Volatility Index ($VIX) gets a lot of attention from both technical analysts and the media. That was the case this week, as $VIX spiked higher – rising to 25.84 intraday on December 13th, before reversing sharply downward after the CPI number was released. It closed that day at 22.55, more than 3.00 points below its high, and that generated a $VIX “spike peak” buy signal, by our definition.

Technical analysts are always cautioned against looking too closely into why a particular signal was generated. The fact that it was generated is supposed to be reason enough. But, in this case, the last part of the move upward in $VIX was purely statistical and not related to market action. A “spike peak” buy signal is supposed to identify a market over-reaction to a selloff, a condition of “fear,” if you will. That is, as the market declines, $VIX advances and accelerates to a peak, as the public becomes ever more bearish. Then, when $VIX reverses back downward, that is a contrarian buy signal for the stock market. At least that is the theory...

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