Volatility - VIX

This isn't something I'd normally cover, but apparently its getting a lot of attention from the press and therefore I'm getting a lot of questions. So lets take a look at the VIX, the CBOE Market Volatility or "Fear" Index.

First real quick, the VIX moves opposite the market for the most par, once in a while the VIX can act as a very short term leading indicator, there are several different setups including the Bollinger Band one that many of you are familiar with.

When the VIX ix low (and it has been SUPER low recently), there's less fear in the market, this usually corresponds with market tops. When the VIX rises or hits high-end extremes, this is a lot of fear in the market and usually correlates to a market bottom.

Recently on August 17th we hit about 5-year lows in the VIX. From there the market moved up to the September 14th top, the day after QE3 was announced (more evidence of the F_E_D Knee-jerk reaction I always warn of in which the initial reaction is almost always wrong as it was this time), from that point the VIX started moving up and the market started moving down with the VIX hitting its closing high of $19.07 on 11/7 last week.

Today the VIX is down -9.13% and is getting a lot of attention as to what it means. I'll give you some information, you can decide what it means for yourself, there are a couple of camps that have very different opinions on what it means, some think it's the resolution of the Fiscal Cliff being priced in and representing the other side, Zero-Hedge thinks,

  " Investors had bought short-term VIX across the election and are unwinding that protection in the November futures contract but at the same, they are actively bidding for protection across the event-horizon of the fiscal cliff - out to Fedb 2013."  

 I'll let you know what I thin after you see the charts.

 First of all, well before the election the VIX was showing signs on the daily chart that it was hitting a sort of resistance, note the long upper wicks of the candles, the small bodies, some hanging men (although they were after the election) and today's move down toward complacency.

 Looking at the daily 3C chart close up we can see several positive divergences followed by moves up in the VIX. The most recent positive divergence is still impressive and would tend to lean toward the market seeing a nasty downside event, but that must be taken in stride when we consider we are looking at nearly 2.5 years of data here.

 A closer view of the recent daily positive divergence shows a head fake in yellow on a  negative divergence, a strong positive divergence with the VIX moving up after that and a recent smaller negative divergence with the VIX moving down. This last divergence may be politically related, in which manner though I can't say. The 11.22% drop is from last week's high the day after the election.

 Here's the VXX (30 min) used or intraday with a nearly perfect 3C/price confirmation trend at the green arrows until recently with a negative divergence, again after the election.

 VXX 10 min shows a positive divergence and a negative that is clear again, after the election.

 This is VIX which is the Daily Inverse VIX Short Term ETN, there's a nice recent leading positive divergence, this is part of why I like this one long for a volatility play right now, it also fits with our bounce expectation. This 10 min chart's leading positive divergence is impressive and in the right timeframe and place for our bounce expectation. However, even though this went positive before the election, it went leading positive right around the resolution of the election.

XIV on a 1 min chart is leading positive today which makes sense with the VIX's dive today.

I don't know what camp is correct, but what I see is near term VIX downside and longer term VIX upside, this fits exactly with my expectation of a strong bounce in the market followed by a real and serious drop to the downside, one like we haven't seen since 2011, maybe even longer.

I suppose in a way, both camps could be right, they just aren't looking at the market as dynamic and trying to establish it as a monotone, one directional beast, we all know it's not.