$VIX – Adaptiv

Fear Hits Target

March 12, 2015April 13, 2022

About a week ago, we let you know about a bullish breakout in the Volatility Index (VIX) from a downward wedge formation. As anticipated, VIX continued its breakout and has hit our target. In addition, we pointed out that:

At minimum, we’ll see a retest of previous highs in the S&P 500. If those previous highs are taken out, a false move will be in play and we could see a rapid downward move in the market.

As expected, the breakout in volatility coincided with weakness in US markets, including the S&P 500, which is down 3% in 5 days and has broken down through previous highs.

We indicated back in February that in regards to the S&P500, we would be long above 2088.48, short below it. Investors could have taken advantage of this situation by shorting the S&P 500 using an ETF such as SH and/or (we like doing both) going long VIX using ETFs such as TVIX and UVXY (both up 20% since the breakout). At this point, when you look at the chart above, the S&P 500 is right at the edge of our shaded resistance and up against a 61.8% Fibonacci retracement (in purple). In addition, VIX is up near several points of resistance (not shown), including the upper edge of a downward channel and at 38.2% retracement. Accordingly, we’re closing our long VIX trade and watching the S&P 500 price action closely. We expect the S&P 500 to bounce a bit here and we’d reestablish a long S&P 500 position if/when new highs are made with a close above 2117 on the index. On the other hand, if VIX breaks up from the downward channel, we’ll consider jumping back into the VIX long trade.

No matter the trade, we’ll let price be our guide.

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Disclaimer: nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. Simply put, you are an adult. You invest based on your own decisions. 🙂

Equity

Fear Breaks Out. Market Highs To Be Tested.

March 4, 2015April 13, 2022

Since mid-February, the S&P 500 has broken out to new all-time-highs. As anticipated, during this breakout, market volatility (as measured by the VIX) has subsided. That is until today. The fear index (VIX) has broken out of a bullish falling wedge that took a little over a month to form. Not coincidentally, this breakout is taking place right near an expected resistance point, an upward trendline connecting previous VIX lows of July and December 2014 (marked with a green trendline on the chart below). As you might recall, we pointed out back in January that the VIX has been rising along with the S&P 500. With this new breakout in the VIX, this concerning market condition still exists. At minimum, we’ll see a retest of previous highs in the S&P 500. If those previous highs are taken out, a false move will be in play and we could see a rapid downward move in the market. From false moves, come fast moves. We’ll know we’re in that environment if the S&P 500 takes out the support area highlighted in gray below. This area marks where previous supply should turn into new demand. Those long this market want to see that area of demand hold. If it doesn’t, market participants will need to be nimble. Remember, “the market moves up the escalator, down the elevator.” Downward price movements are almost always more rapid and violent than any upward move. We need to be ready for this scenario. On the other hand, it would be extremely healthy for this market to test previous highs and move on to exceeding the February highs. If that takes place, we should see smooth sailing in the market for the intermediate future.

Trade safe. Don’t trade what you think. Trade what you see.

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click chart to enlarge

Equity

A Little Fear About The FEAR Index

January 10, 2015April 13, 2022

Back on November 13, 2014, we wrote about our concern over elevated volatility as part of our seven-part series on evidence currently warning of a possible trend change in the overall U.S. Equity market. Almost two months later, none of the issues identified have resolved and remain cause for concern that stocks are weakening and could lead to a large correction. The only piece of evidence, and the most important, that has held up is price. Since November 13, the S&P 500 has traded sideways in a volatile fashion with large percentage moves in either direction. The market is at a very important inflection point. Buyers need to step up in a big way to prevent another visit to the 1800s (-10%) on the S&P 500.

This brings us back to revisiting what is currently taking place with the FEAR Index, or VIX. As a reminder, the CBOE Volatility Index (VIX) is a forward looking instrument calculated from option activity, and reflects the market’s expectation of 30-day volatility. We like to look for divergences between the VIX and the US Market. We look for odd behavior. Normally, as would be expected, when fear/volatility increase, stocks decrease in price – and vice versa. However, sometimes a change in market sentiment from greed to fear (and the opposite also applies) can tip its hand. When we see fear/volatility increase along with market prices, we take notice. This is odd behavior and could be a warning sign that market participants (big money managers) are changing their mood. This was taking place back in November and continues to be an issue today. As George Soros once noted:

Volatility is greatest at turning points, diminishing as a new trend becomes established.

The chart below is an updated version of what we provided you back November. Note that volatility has continued to increase, both in the VIX and now in the price fluctuations of the market. This needs to resolve quickly. Those long this market need volatility to drop and new highs in the market to reestablish. Otherwise, the opposite will apply – new highs on the VIX and new lows in the market. A revisit to the 1800s would be likely. This market will require traders be nimble in the coming weeks+. Keep in mind that price is the final arbiter of value.

For your reference, I’ve provided a chart of this scenario from the 2007 top below the current day chart. This doesn’t have to play out again, but we should always sit up and take notice when volatility increases.

Trade safe. Don’t trade what you think. Trade what you see.

VIX Fear Index 2007 — 2007 Elevated Volatility

Equity

The Curious Case of Elevated Volatility [Weight of Evidence,…

November 13, 2014April 13, 2022

“Fear tends to manifest itself much quicker than greed, so volatile markets tend to be on the downside. In up markets, volatility tends to gradually decline.” ~ Philip Roth

The CBOE Volatility Index is often referred to as the FEAR Index. This forward looking index is calculated from option activity, and reflects the market’s expectation of 30-day volatility. We like to look for divergences between the VIX and the US Market. We look for odd behavior. Normally, as would be expected, when fear/volatility increase, stocks decrease in price – and vice versa. However, sometimes a change in market sentiment from greed to fear (and the opposite also applies) can tip its hand. When we see fear/volatility increase along with market prices, we take notice. This is odd behavior and could be a warning sign that market participants (big money managers) are changing their mood.

Below are two charts: one from 2007 and one from today (2014). Both show that while the US Market (in this case, the S&P 500) is making higher highs, the VIX is making higher lows. They are moving together. Odd behavior. In 2007, this was a clue that a change in trend was approaching. And as you can see, the same is taking place now. Does it mean that this is the top of the market for the foreseeable future? No. But, it means we’re going to keep close eye on the price action from here until this odd behavior resolves itself. Those who are looking for the bull market to continue want to see lower lows in the VIX and the market to hold onto these highs.

Stay curious, investor. Check back again tomorrow as we’ll have more to add. And if you find this information useful, make sure to share the wealth using the share buttons at the bottom of this article.

Candle Sticks

Next Week is a Big Week for the Market

October 17, 2014April 13, 2022

The major US markets have been structurally damaged, increasing the likelihood of a large correction beyond what we’ve already seen. That being said, we are keeping an open mind and searching for evidence that we could see a short term bounce in the US market (S&P 500, Dow, Russell 2K). Here are some signs that we’re getting ready for a relief rally:

Russell 2K (See chart below) | Positve candle formation and a daily close above previously broken support (1082). The Russell 2K tends to give early signs compared to the rest of the majors. The basing by this small cap index is a positive development. It is very close to reaching 1100 and closing our Russell 2K short trade. *NOTE: at publication time (close of trading, Friday), the positive candle development turned neutral if not bearish.
50 day Rate of Change (ROC) on the McClellen Summation Index (not shown) | This indicator looks at the 50-day rate of change (ROC) in the Summation Index. It simply compares today’s value to that of 50 trading days ago. Mathematically, it is another way of quantifying the total of the last 50 trading days’ McClellan Oscillator values. When it gets to a deeply negative value, it indicates a longer term oversold condition for the market, one which is difficult to sustain past a certain point. When this indicator turns back up again, the message is that the big oversold condition is waning, and a rebound period is getting started. That is the condition in which we find ourselves now.
The CBOE VIX Index (See chart below) needs a breather | The VIX gets its share of criticism, but in rapidly moving markets it has its place in the toolbox. Research by Nick Colas of Convergex shows that the long term VIX average – back to 1990 – is 20 and the standard deviation around that mean is 6. That means at 26 and 32 you have 2 reasonable levels where the VIX should top out. Now, if you think we are entering a period of real crisis, the numbers shift higher. Typically the VIX averages 28 when things are really bad (think back to the Financial Crisis) and the standard deviation rises to 8. That puts the target at 36 and 44. Bottom line: don’t try to pick a bottom until the VIX gets to at least 26. We reached 26.00 yesterday. *NOTE: at publication time (close of trading, Friday), the VIX closed at 21.99.

The evidence above points to a short term bounce. But as of this writing (close of trading), it appears the bounce may have already taken place intra-day on Friday. To say the least, the market is at a major inflection point. We’ll provide more research, analysis, and if/then game-planning over the weekend. Next week is a big week for the market. Time to do some homework…

RUT trying to recapture previous support now turned into resistance

Market Environment & Structure

VIX Revisited

June 17, 2014April 13, 2022

VIX Recently posted another 3 point indicator to sell equities in the very near term. It is possible the market weakness has already taken place. This is not indicative of a long term pullback, but can always be the beginning of one. Trade safe.

Tag: $VIX

Fear Hits Target

Fear Breaks Out. Market Highs To Be Tested.

A Little Fear About The FEAR Index

The Curious Case of Elevated Volatility [Weight of Evidence,…

Next Week is a Big Week for the Market

VIX Revisited