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Fear not! Vix spike may be bullish, say charts

(Click for video linked to a searchable transcript of this Mad Money segment)

The Vix, or so-called fear index shot higher on Thursday, hitting its highest level since July 8th. But contrary to what you may think, it's no reason to be afraid.

According to chart patterns, the move could actually be positive.

Huh?

Although he's a fundamental investor, in circumstances that seem almost contradictory, Cramer will often consult with a technical analyst in an attempt to glean valuable insights.

For the following analysis he turned to Mark Sebastian of OptionPit.com.

As you may know, the Vix and the S&P 500 are usually correlated, inversely. That is, as one goes up the other usually goes down.

However, if you dig way down into the market over the past 48 hours, Sebastian says that's not been the case. That is they've traded in tandem.

Stockbyte | Getty Images

Now, it may have not seemed that way at the open when the S&P 500 made a hard move lower, touching 1660, while at the same time the VIX spiked to nearly $15.

However, 45 minutes later, the S&P traded down toward 1660 again, while the VIX went lower too. And as the stock market waned, the volatility index never recovered, dipping down to $14 and change.

Despite the spike, Sebastian says, when the inverse correlation breaks, it's a mistake to think sharp gains in the Vix are a sign of panic.

Instead, he says, when the correlation breaks, it's a sign that whatever trend happens to be dominating the stock market isn't going to last.

And the dominant trend at the time was weakness.

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Now Sebastian concedes that the S&P could still go lower tomorrow, it's just that the action in the VIX suggests that him that the market won't undergo an extended sell-off. In fact, he thinks the current weakness in stocks could soon end.

Ultimately, he thinks it's more likely that the S&P will make a trip back above 1,700 rather than a trip back below 1,600.

Cramer believes the analysis warrants attention. "Sebastian has been right before at times of extreme panic. This may just be one more time that he's nailed it again," Cramer said.


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