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Monday, July 30, 2012


There is a divergence between the VIX and SPX.  I have written about these a number of times in the Yahoo groups, but this is the first real noticeable one we have had for a while.  Here is the daily chart.

We have a higher low at this point and the 6 SMA is still above the 18 SMA.  This chart is in a position that it could turn back up very easily.  Take a peek at the 195 minute chart.

The VIX is hanging around the lower Keltner channel.  It has not clearly broken down.  Notice the area circled in June where it did the same thing when this rally was getting started.  This is a common occurrence at turning points.  The daily chart works the same way.  In fact you can see it happened at the end of April in the daily chart (above) right before the big swoon.

A divergence of this magnitude usually means a big short term move is coming.  Either the market reverses making the VIX correct, or the market keeps going up and the option players will pile in driving prices higher.

Shaeffer's research came up with an article about how the actual volatility of SPX is higher then the VIX value which is a somewhat rare occurrence.   You can read the full article here.

What they are saying is when it happens with the VIX below 20 it usually means it is a good buying op.
Here is a chart they show in the article.

The one I circled was too early.  However, the other five occurrences did prove to be good buys.  With the VIX above 20 some were good buys and some were at the start of killer down drafts.

I almost fell out of my chair when I read the following lines.

You can see that during the bull market from 2003 through 2007, these signals occurred with a relatively low VIX, and they were very good at marking the bottom of market pullbacks. Being in a similar environment now, it wouldn’t be surprising if this were a good short-term buying opportunity.

Is there really anybody else in the world besides the author that thinks we are in a similar environment to the 2003-2007 time period.  Other then that, the research is pretty good.  What the chart really shows us is that this condition often precedes big moves.  All we need to do now is determine the direction.  I think we are very close in time to that decision.  We have four clear higher highs on the daily SPX chart.  If the market cannot reach escape velocity from that pattern then a big move down becomes extremely likely.


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The information in this blog is provided for educational purposes only and is not to be construed as investment advice.