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[Camisa Roxa]

The CBOE Volatility Index (or VIX) can be used in many ways. While we use the daily
data for short-term positions, we also use weekly data to point out intermediate term
trends. It is this weekly chart where are now setting up a potential buy signal, but
it will depend on today's closing level.

Our interpretation of the VIX is straightforward. We have seen that markets usually
reverse into an uptrend just when fear and pessimism peaks. So, when we get extremely
high VIX readings (interpreted as extreme bearish opinions), we are ripe for a
bullish turnaround. The tricky part is knowing exactly when the VIX peaked. While a
higher VIX does indicate plenty of fear, we want to know that all the fear,
bearishness, and pessimism has been exhausted. To do that, we actually want to see
the VIX begin to decline off of a high.

Why is that? The VIX is a measure of the price of bearish put options in relation to
the price of bullish call options. People who think the market is going down will
demand puts, thus driving up the price of puts, as well as the VIX. Conversely, when
investors think the market is headed higher, they buy calls, which results in a lower
VIX reading. When we actually see the VIX beginning to decline, we know that all of
the bears have exhausted their capacity to take bearish positions. In other words,
they may still have a bearish opinion, but they just can't sustain the demand for put
options. When that happens, only the bulls are left with buying power, which pushes
the market higher again.

This is important to understand this week, as we did indeed see a VIX peak above the
critical 40 level. The next step to a buy signal is a weekly close under the low of
last week, to confirm that we have peaked and started to subside. Last week's low was
29.22, so we have a pretty big gap to fill from Thursday's (Jan. 30th) close of
36.37. This is not likely to happen today, but not impossible. The more likely
situation is a close next week under this week's low of 34.75. Assuming we don't make
a new weekly low today, take a look at next Friday's VIX closing level for a buy
signal if it's under 34.75.