Tag Archives: CBOE Volatility Index

Although the VIX is speaking, only part of its message is being heard

Many believe the following chart of the VIX signals the end of the global correction.    The fear index climbed to the 20-level late last week, as it did twice on apparent corrections in 2013, only to fail at resistance and allow stocks to turn higher again.

vix d 09feb14

A similar expectation would be reasonable now, were it not for the weekly chart of the VIX below.   It shows a continuing positive divergence in the VIX primary trend, with the indicators healthier on this test of resistance than on both prior tests.  The differences suggest a different outcome this time around, arguably a push past 22.

vix w 09feb14

But the weekly is not the only improved VIX pattern.  The monthly VIX shows development of its own upturn.  And if it’s not quite as mature, even a forecast breakout in the long-term VIX carries consequences for stocks that far exceed those associated with the weekly.  In fact, nothing could affect stocks more.  Think of the last divergent monthly upturn in the VIX circa 2007.

vix m 09feb14

The monthly VIX has been improving for a year.  Progress began in March 2013, when the index posted its last new low.  In the eleven months since, each VIX low has been successively higher.  Each bounce high over the period has also been successively higher.  That’s a pattern that should be respected, especially against a backdrop of positively divergent indicators.  Instead, as of this writing, the pattern has been ignored.  It should not be.

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Market Outlook

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Weekend update, looking ahead to this week’s FOMC meeting

If few admit surprise that the S&P corrected in January, most will confess that the sharpness of the sell-off so far was totally unexpected.  But one-sided sentiment on either side should always be cause to expect the unexpected.  At this juncture, it makes sense to expect a test of S&P support near 1775, followed by a rebound.  Why?  A) The market is short-term oversold, and will be more so at 1775.  B) The intersection of support at 1775 – a retracement level, a neckline and the 100-day moving average close by – is substantial.  And C), an FOMC meeting is scheduled this week.  The primary question is, will the Fed taper, as most believe, and risk further currency fallout in the reserves-withered Emerging Markets?   And will taper-no taper matter, if Japanese PM Abe can’t slow the global carry-trade un-wind?

spx 26jan14

Unlike the S&P or the Dow Transports, the Dow Industrials have not posted a new high in 2014.  The significance of that divergence increases with each broken support suffered in this decline.  Should next support near 15,700 give way, it might not doom the Dow to bear market inevitability, but it will reduce the probability that the Dow Theory violation can be corrected.

indu 26jan14

Speaking of the Transports, Friday’s 4% decline seems significant beyond its point loss.  Coming 24 hours after Thursday’s new all-time high, the largest percentage decline in 3½ years almost has to signal an important trend reversal.

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Still, the bell cow this cycle remains the Nasdaq Composite.  As long as the COMP’s bullish trend channel points higher and to the right, investors will view pullbacks only as dip-buying opportunities.  Expect that theory to be tested this week, but odds are that it will pass with flying colors.  Its current pullback already looks extended, yet its next serious test of support remains comfortably distant.

compq 26jan14

But two developed warning patterns that have begun to signal are lurking in the longer-term background.  The first, below, is the VIX.  Importantly, however, it’s not the trading VIX, which surged 32% Friday, nor the primary trend VIX, which also recently turned up.  Both of those have been known this cycle to spike impressively higher one period, only to fizzle and return harmlessly lower the next.  What this chart shows is the monthly VIX.  When the monthly changes direction, it almost always brings important consequences.  As evidenced in the chart, VIX “crossovers” in either direction occurred only six times in 13 years.  Each turn led to a major reversal in the S&P.  The current upturn looks like number seven.

vix 26jan14

The other warning pattern is the primary trend yen chart below.  The upturn anticipated last month is fast becoming this month’s pox on stocks (and everything else risk-on), even if it ultimately traces out only an a-b-c counter-trend upturn.   As discussed many times the past thirty days, a rising yen undermines the hugely leveraged carry-trade, no matter which risk-on asset is carried.  And given the yen’s overwhelmingly bearish sentiment at year-end, investors were unprepared for any upturn, let alone a primary trend upturn, hence last week’s aggressive un-wind.  Additional pain seems likely.  For that reason, bearish pattern read aside, investors should be on the alert this week for a response from Mr. Abe, one probably involving his QE fire hose.  We’ll see.

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But carry-trade un-wind isn’t the only factor responsible for the U.S. correction.  Earnings misses, declining share buybacks, GDP forecast revisions and continued deterioration in jobs and income trends all helped push confidence and prices down.  Possibly the clearest reflection of eroding economic confidence can be seen in the rotation out of retail stocks.  And it’s never a good sign when the sector responsible for 70% of GDP ranks among the worst performers in the stock market.

xrt 26jan14

Perceptions in the bond market have also changed for the worse.  And the complete about-face in bond prices in the past five weeks signals borderline dramatic change.  Nothing less could convert 95% bearishness bond traders to a trend line breakout in Treasury bonds, with a further neckline breakout pending.

tlt 26jan14

In the face of nearly unanimous expectations that the 10-year Treasury yield would continue to push past its 3.04% high, yields actually reversed early in January, and now have retraced 62% of Q4’s fifth wave upturn.  While a short-term rebound should follow, either from Friday’s close at 2.73% or a possible test of 2.69%, the trend direction in rates for the moment remains down.  Ultimately I expect new correction lows.  It’s even possible, with the economy faltering and earnings falling short of expectations, the TNX could re-test its October’s low at 2.49%.  That said, once rates complete this correction, their long-term upturn should resume.  The curious thing is that the rise will have little to do with a strengthening economy.

tnx 26jan14

My review shows the vast majority of global markets in downside synch.  And in the U.S., even the most stalwart, bellwether industry sectors show primary up-trend cracks.  Bottom line, the technical damage these past few weeks, whether the result of correction, recession or carry-trade un-wind, might be more significant than the lost market value.  That is, from its look and feel, if this really is just a correction, the inevitable rebound will warrant close attention.  While it could presage additional highs, it also could segue into another correction, possibly a deeper correction.

Which makes the following chart of the Shanghai Stock Exchange Index all the more curious.  Belying all the bad financial news in China, the SSEC is building a nice bottom and could turn up soon, if it hasn’t already.  But in reaction to what?  Growth estimates are falling, as demand-challenged trading partners continue to starve China’s export machine; production facilities are shuttering, as weakened demand adds to the problem of idle capacity; and the country’s financial crisis is only deepening.  Shadow banking is a tinderbox, depositors have been denied access to their funds, and overnight repo rates stabilize only when the PBOC pours liquidity into the system.  Bottom line, the backdrop in China is not good. Yet that chart below shows real promise.  That alerts me to approaching government intervention.

ssec 26jan14

Others must sense the same thing, given the early upturn in the pattern.  And that previously was signaled by the SSEC’s oversold low and its divergent histogram.  But the pattern needs further incubation, first, to build a better trading base and, second, to provide the developing bottom in the weekly SSEC chart time to catch up.  That raises the possibility of a trading re-test.  Still, the question remains, what intervention haven’t Chinese officials already tried to quell concern in shadow banking, let alone kick-start more than two quarters worth of “growth?”

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CBOE Volatility Index – VIX

VIX has reached resistance ahead of schedule; technical profile stronger than expected, suggesting S&P at even higher risk than expected

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CBOE Volatility Index – VIX

While investors continue distracted by D.C., attention should be focused on unusual trifecta of daily, weekly and monthly VIX upturns

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CBOE Volatility Index – VIX

QE has proven it can trump the daily VIX, but less so the weekly, and the monthly not at all

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Trading VIX turning up as indicated, while primary trend bottom-building continues

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VIX re-tested and held, setting up a trading upturn; should prove choppy until the primary trend confirms

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VIX progressing toward an extended divergent bottom

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S&P’s higher highs should bring VIX lower lows, but they’re not, suggesting rally risk

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The still, more divergent VIX futures inversion suggests rising risk

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A turn indicated, probably not THE turn

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Weekend Roadmap: VIX-centricity could trump even fiscal cliff resolution

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Weekend roadmap: go with DIA – Beware of VIX weekly

Weekend roadmap: go with DIA, based on post-cliff resolution restocking expectation, but beware the maturing VIX weekly

DIA – Daily

SPY – Daily

QQQ – Daily

IWM – Daily

VIX – Daily

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Weekend roadmap: pullback likely, prior to last push

SPY – Daily

DIA – Daily

QQQ – Daily

IWM – Daily

VIX – Daily

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Market Roadmap – DIA, SPY, IWM, QQQ, VIX

We expect a corrective move down from the last five days of rallying.  If a move lower accommodates our expectations, it will be the b wave in an a-b-c corrective phase described by the Elliot Wave Principle .

The simplest explanation for what we are looking for is a visual aid below from StockCharts.com – ChartSchool Elliot Wave Basics - You can click the preceding link for a quick tutorial if you are not familiar with Wave Theory.

We are looking for b down noted by the dashed red arrow.

Elliot Wave 5 wave down sequence with an a-b-c upward corrective wave

DIA – Daily

SPY – Daily

IWM – Daily

QQQ – Daily

Conversely, we expect this last chart shown of the CBOE Volatility Index (VIX) to rally in confirmation of selling in the broader market.

VIX – Daily

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Oversold indicators and divergent VIX suggest we have a tradable bottom

On October 14th, and again on October 16th, we posted commentary about our anticipated development of an oversold condition, that would setup a trading bottom in the market.

VIX diverging now; S&P trading bottom approaching?

Transports set for a flush – $TRAN

Our fund had gross market exposure of 40/60 – long/short, until the morning of October 15th, when we started the shift to our current gross exposure of 58/42.

We don’t know how long the expected rally will last, but we do know the market likes to confound expectations.

SPX – Daily

DIA – Daily

VIX – Daily

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