The Volatility Index Will Bottom in January 2010:

The Chicago Board Options Exchange Volatility Index is bottoming which means more market turmoil is on the way in 2010. The volatility index, better known as the VIX, is widely used to gauge investor fear. Generally, when the value is greater than 30 there is a large amount of volatility in the S&P 500, and when the value is below 20 it makes for a calmer more complacent environment.

The VIX peaked in 2008 near the 90 level when the financial meltdown began. Since then, it has gradually moved lower to more reasonable levels, and has recently moved below the 20 level. Complacency is setting in as stock indexes continue to move to higher levels nearly every other day. Basically, this means that when the Dow Jones breaks down out of its rising wedge there will be a lot of investors caught off guard and they will panic sell one after the other. The market will see a violent sell off and the VIX will surge as fear once again returns to the stock market.

Daily Chart of the VIX

Using technical analysis, and looking at a weekly candlestick chart of the VIX, it is clear that it is carving out a broadening bottom pattern. It will likely move to the lowest level either this week or the second week of January before exploding higher. The NASDAQ formed this same pattern on its daily chart when it bottomed in March of 2009. After bottoming, the NASDAQ soared higher and rarely looked back for the rest of the 2009 year.

The VIX is bottoming near the 18 to 19 level which means the Dow Jones is topping near the 10,600 level. When the VIX makes its next thrust towards its upper trend line, it should cause the Dow to break down out of its rising wedge pattern on strong volume. As mentioned in Part 2, the breakdown should send the Dow back to the 9,100 level. The set up on the VIX is yet another reason the market will move lower in 2010, but it's still unclear what piece of news will bring this extreme fear back into the market.