One Chart I Forgot-The VIX

A lot of people don't understand the VIX, the history of the VIX, what it is supposed to do.

I remember in the late 1990's/early 2000's the VIX was a fantastic indicator, it broke below 20 and you had a rally, it broke above 30-35 and you had a sell-off, it was pretty darn dependable, but manipulation of the market is a lot different now than back then with different players including those who use Technical Analysis against Technical traders, the rise of the HFTs, the historic policy accommodation of the F_E_D and even the PPY, Plunge Protection Team that I have no doubt is very real as myself and David-DT (many of you know him) traded together through late 2008 and early 2009, we got so good at calling F_E_D PPT intervention, we had it down to within 10 minutes, I won't go in to how we knew, but if you know David, email him and ask him.

The CBOE's VIX is meant to project the market's forward looking 30-day volatility, but the VIX (as surprisingly few people know) is not the same VIX of the Tech boom. In 2003 the CBOE worked with Goldman Sachs (they are everywhere!) and changed the components from which the VIX is calculated, from the S&P 100 Index to the S&P 500 Index or SPX. What you once knew as the VIX back then is now called the VXO. You might argue the VXO still has some usefulness along the lines of the old ranges, although it can be quite volatile at times.

Further changes that I think effected the VIX included trading of the VIX futures on the CBOE for the first time in March of 2004.

What I showed earlier today and is worth showing once more since the VIX is a traded instrument is the 3C daily divergence which has always worked pretty well. I already told you that the recent huge Bollinger Band volatility in the VIX that has since pinched to a very narrow range, indicating a highly directional move is to be expected, is the most dramatic I have found at a bottom like this in years. Add to that this 3C chart since the new VIX...

The positive divergences tend to be big, but so do the following moves, this would be the largest leading positive 3C divergence ever since the VIX was re-worked and not even a month after the VIX hit 6 year lows.

There are a lot of reasons I have been cautious with some of my favorite longs that have been doing well like ZNGA for example.