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Wednesday, October 24, 2012

VIX extremes

The VIX has been below 20 for quite some time now.  I thought it might be interesting to see what happened in other instances since 2009.  Here is the VIX chart.

There have been four other prolonged low VIX periods.  Those periods were 8, 11, 11, and 5 weeks.  We are currently in week 13.  The vertical lines mark when the VIX first crossed appreciably above 20.  The red arrows mark when the weekly VIX chart had its first green bar but that bar did not cross above 20.  The green arrows mark when the VIX closed above 20 on a weekly basis.   The crash in 2010 happened right with the cross back above 20.  In early 2011, there was a much smaller pullback after the cross above 20.  This is the only time the market actually went higher after the first green bar on the VIX..  That is also the only first green bar that closed below the 18 SMA.  Notice that when the pullback came, SPX dropped below the low of the week with the red arrow.  The second low VIX period in 2011 saw a market pullback start with the first green VIX bar.  That bar closed above the 18 SMA, but was below 20.  The first low came when there was a weekly  VIX close above 20.  That rally went to a lower high and was followed by a bigger sell off.  The first low VIX period in 2012 bounced around a bit after the VIX got above 20 before selling off.  There was some follow through on the down side after the VIX closed above 20, but the market quickly rebounded.

Where does that leave us now?  We have had a first VIX green bar and it closed above the 18 SMA.  Based on this limited data set, that suggests a high has been made. That could also mean we would need to see a weekly close on the VIX above 20 before we get a decent bounce.  That bounce could be to a lower high and be followed by a bigger sell off.  The pullbacks from this condition ranged from about 7.5% to 20%.  I think it seems reasonable to expect at least a 7.5% pullback this time before it is all over.  Watch for that weekly close above 20 for a possible bounce.   


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