VXX Implies A Stunning Decline Lies Just Ahead

Incredible! The Dow swung nearly 570 points on Tuesday without breaking above or below the previous day’s range.  This is what chartists refer to as an “inside day.” In fact, the blue chip average didn’t traverse even half of Monday’s epic, 1214-point swing. Get used to the wild oscillations, since volatility is unlikely to subside until we come to regard a bet on more of it as a sure thing. Paradoxically, because the big moves up or down lately have more or less alternated from one day to the next, VXX, which measures short-term S&P volatility, has remained relatively subdued. Don’t dare let down your guard, though, because a blow-off to the 56.30 target (see inset) looks like a lead-pipe cinch. Unfortunately for investors, VXX could never reach such heights without a correspondingly wrenching selloff in the S&Ps. If the finishing stroke lends symmetry to the big pattern shown in the chart, the selloff will probably occur within the next 3-4 weeks. Although we’ll be able to say then that we were ready for the move — expecting it! — don’t be surprised if whatever happens to cause VXX to hit 56.30 still seems shocking.

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