VIX / VXX Update

The VIX is also called the Fear Index, if you were trading in during 2000, then you are probably pretty familiar with it as it use to be pretty good at predicting reversals when above 40 or below 25. The VIX has an inverse relationship with the market as you'll see on the first chart. Low readings indicate complacency and are often associate with market tops, high readings indicate fear and are often found at market bottoms (see how emotions are a great inverse indicator?). I should mention that the VIX was re-worked in 2003 and the old VIX is now called the VXN. The VXX is an intraday volatility index like the VIX and I use it for timing for the VIX.

 The VIX is green, the S&P-500 white, you can see the inverse relationship clearly on this daily chart.

 So the VIX has been hovering around the lows recently indicating complacency in the market, traders have little fear of a market correction of fall. We can use 3C on the VIX to show accumulation and that's what we see here.

 The last time we had VIX accumulation 9not as strong as you can see) was going in to May, June of 2011, July we saw the market water fall sell-off so 3C has some value with the VIX.

 This 3C positive divergence in the VIX was around May 2008, which was also the top of a bear market rally and the SPX dropped about -52% from May 19th 2008 to March 9th 2009. Our current divergence is about the same size as the 2008 divergence, actually right now it' about a month longer (typically the longer a divergence persists, the bigger the move that springs from it).

 For timing, the VXX intraday charts are useful. Here we see the 60 min chart, the longest intraday timeframe and the most important, there's a solid positive divergence, indicating it is likely the VXX/VIX will head higher shortly, which would have the opposite effect on the market.

 The 30 min chart is sharper, it has more detail and shows the second bottom of this small double bottom or if you want to call it the test of support, has a very strong 3C leading positive divergence, indicating that it looks like the VXX ix under accumulation for a move higher, again it would have the opposite effect on the market.

 The recent 5 min chart shows accumulation sending the VXX higher on the 24th, the market was down about 1/2 a point on that day, then another positive divergence which is bigger and stronger as it is leading since March 1st culminating with a move in the VXX today of 6.68% and the SPX fell 1.46% which by the way is the biggest move down since the rally started.

Here you can see today was the largest % drop since December.

The VXX 2 min chart showed a negative divergence today around the same time the market, especially the IWM was showing an increased positive divergence ( I love confirmation like that).

So the take away... It's back to the AAPL Theory I laid out Friday and more recently Sunday in this post.

The short term indications would suggest we get a move up, the longer term indictions suggest that move will fail and will be the trigger to bring the market down.

You can also trade the VIX options or the VXX, several members trade the VIX and have seen some amazing % moves.