Thursday, January 23, 2014

VIX Volatility Weekly Chart

Volatility remains very calm and complacent indicating that traders do not have any worry or fear about any serious market selling ever occurring again. The red circles show significant market tops and the green circles are significant market bottoms. What do you think is about to happen as the red circle on the right hand side prints? Note the downward pattern over the last couple years that clearly illustrates the power of the Fed, BOJ and other global central bankers. The stock market is goosed to the point that price discovery is lost and no one truly knows what anything is worth anymore. This is why the VIX trails lower month after month. There is zero fear. The Fed's new mission is to keep the stock market pumped higher and make the rich richer. Volatility moves inverse to the broad indexes so the VIX drops.

Note the falling blue wedge over the last two years. Even with obscene money printing and other central banker shenanigans, over the longer term, the bill comes due, and the technicals will win out. A falling wedge is a bullish pattern for VIX (bearish for the markets). The indicators all favor positive divergence over the last couple years. As the VIX keeps teasing new lows, the indicators are no longer interested in moving lower and would rather see a higher VIX. Since traders are lulled into a Rip van Winkle sleepy complacency when volatility and put/call ratios remain low for long periods of time, many will be shocked at the viciousness that can appear quickly as equities tumble into free fall.

The last large market sell offs were in 2012 where the market bottoms were identified by the VIX above 23. Since a reversion to the mean is desperately needed for the equity markets right now, and the technicals and charts are lined up this way, a move up into the green circle, and probably well up into the 20's, perhaps higher, is likely on tap. As discussed with the recent CPC and CPCE put/call ratio charts, the prudent move is to already be out of any long position that you are not willing to hold for several years. Sit in cash or start shorting depending on your risk tolerance. Prepare a shopping list and the time to buy the longs will be when there is blood in the streets as the VIX moves into the 20's, perhaps 30's, perhaps higher. Simply scale in as the VIX climbs but do not consider any long until the VIX is up into the 20's and higher.

If the VIX runs to 50 and higher we will be in an event like the August 2011 crash or the Fall 2008 crash. Of course the height of panic and fear, with blood and carnage in the streets, when folks are jumping from windows, hopefully only first-floor windows, is exactly when you want to go long. Until then, simply monitor the market action with a hefty cash position set aside and/or play the short side. The large sell offs were about 120 to 200 SPX handles or more. The smaller sell offs from 40 to 120 SPX points. The SPX is at 1840-ish so a move down into the 1680-1810 range is easily doable, probably more towards the lower end at 1680-1780.

Can the VIX head lower and the good times continue? Yes. Nonetheless, the low VIX, flattening and recovery of the moving averages, falling wedge, reversion to the mean on tap and positive divergence all hint that the equity market top is either in or very very near. Projection is for a higher VIX, and the spke may come fast and quick, and correspondingly lower equity markets, for the weeks and months to come. Higher volatility will return and likely be a theme for 2014. This information is for educational and entertainment purposes only.  Do not invest based on anything you read or view here.  Consult your financial advisor before making any investment decision.

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