VIX may suggest a snapback rally in SPX: Sell the Rip?

15 giu 2022

VIX, the US volatility index, may have just signaled a snapback rally in broader US markets such as SPX, NDX and RUT. But the SPX rally will likely be very short lived. Should the rally be shorted? The short answer (no pun intended) is yes.

Several reasons support possibility of a brief snapback rally in SPX and NDX in the coming days (perhaps tomorrow), a bear rally also known as "mean reversion." This rally in the indices would correspond to a pullback in the VIX. In summary, the reasons for a short-term pullback in VIX (and rally in SPX) include:

• Break of upper Bollinger Band followed by pullback in VIX—but this also signals that the uptrend in VIX is very likely to continue after the pullback. For further explanation, see this issue addressed below.
  
• Inside day candle today, June 14. An inside day signals a short-term pullback here, but not confirmed until break below the low of the adjacent high bar.
  
• Upper shadows near resistance at the upper trendline of a wedge formation that goes back to months.
  
• Five consecutive down days in SPX and NDX with lower lows, with divergences in momentum. At other points in time this year, 4-5 day declines led to brief (and sometimes extended) rallies. Consider the March 15-29 rally in SPX and NDX as a more extended bear rally. There are numerous 2-3 day rallies following consecutive 3-4 day declines apparent on the SPX chart below.
  
  

More detailed discussion is included below.

Major US Indices Remain in a Downtrend

Just about every technical indication has revealed a strong downtrend underway. SPX and NDX prices continue to make lower lows and lower highs. Key EMAs and SMAs all slope down, including on higher time frames like the weekly chart. Downtrend lines and downward price channels appear everywhere on Twitter and TradingView posts. (For a downside price target on SPX, see the linked article below.)

If all this technical evidence and price action were not enough, the VIX also supports the ongoing downtrend because it remains in an uptrend.

VIX Remains in an Uptrend

The VIX has been in a steady uptrend, which correlates to a declines associated with heightened volatility and uncertainty in stock markets.

Note the blue double line (uptrending) at the bottom of VIX price lows. This line has been respected as support for quite some time, with only minor whipsaw violations. This slow and steady uptrend has coincided with the bear market in US equity indices.

Note also the steeper uptrend line starting at the April 4, 2022, low and continuing until the June 9, 2022, low. The orange circle identifies where VIX reversed its short-term counter-trend and resumed its uptrend. This uptrend line predicted almost exactly the day when the selling would continue last week as VIX found support there June 8-9 and the selloff resumed on June 9 SPX / NDX.

RSI for VIX also broke a downward sloping trendline shown on the chart above, which supports that the uptrend is likely to continue. This breakout in momentum coincided with the selloff in SPX / NDX that began last week.

VIX's Uptrend Is Very Likely To Continue Higher after a Pullback in the Short-Term

VIX's price action and technicals show that the uptrend is likely to continue. VIX just broke its upper Bollinger Band (BB), which signals two things. Often, when a BB is broken, it shows:

• The trend has sufficient momentum and strength to continue. Technical expert Martin Pring explains in his books, "if price moves above the band, upside momentum is strong enough to support higher prices, and vice versa."
  
• In the very short term (days), a break of a band signals short term exhaustion. Pring explains further that the price may quickly pull back—a pause for breath—until the trend is able to extend again.
  

So in the short-term, it makes sense to think the VIX pulls back (especially after VIX OPEX on Wednesday morning and a lot of VIX options exposure expires), but this pullback likely be brief if it happens at all. After the pullback in VIX, higher volatility and VIX spikes should ensue.

Mean Reversion May Offer Another a Chance to Sell the Rip

Note that mean reversion happens in bull markets too when all traders and investors jump in to "buy the dip" at the 21 EMA, 34 EMA or 50 EMA on the daily, or sometimes, weekly chart. Selling the rip is the exact opposite—shorting in a downtrend after price reverts (retraces) back up toward its mean.

But given how volatile and sharp this downtrend has been, getting an entry right requires experience and practice. A short position (comprising option spread, short stock, or an inverse ETF) can quickly come under intense pressure if a short-covering rally continues further than anyone expects.

DISCLAIMER: This research and its viewpoint is intended to be educational. It does not constitute investment or trading advice. In other words, this analysis is not intended to encourage transactions in any particular securities. It does not constitute a personal financial recommendation or take into account the particular investment objectives, financial situations, or needs of a person's unique circumstances. Readers must perform their own due diligence, and they should consider whether transaction, investment or trade they enter is suitable for their particular circumstances and seek professional advice, including tax advice.

15 giu 2022

Commento

VIX has now filled the gap, and moved lower as my initial post hypothesized (based on the inside day and break of the Bollinger Bands upper band and 5 consecutive selling days in the indices).

At this point, I will not try to guess whether the VIX goes sideways or touches the 21 EMA in the next two days. But in the intermediate term (next few weeks), VIX should continue the uptrend for all the reasons stated above, including more touches / breaks of the widening upper Bollinger Band.

Short-term indicators on the VIX and SPX should tell us when the break lower will occur—but beware of whipsaws around FOMC announcement soon.

15 giu 2022

Commento

My best guess is that in the next several trading days, VIX will continue to push higher. But no need to guess, just follow the VIX, SPX and NDX on shorter-term time frames, which will suggest a likely spot when the downtrend in markets (and uptrend in VIX) will resume.

16 giu 2022

Commento

With a day of wild swings yesterday at the FOMC presser, VIX (implied volatility based on 30-day SPX options) fell approximately 15% from its prior close.

In fact, VIX slightly pierced the 21 EMA on the daily chart only to climb back well above the 21 EMA and close at 29.61.

Because VIX has accomplished the pullback that was expected based on the inside day and the Bolllinger Band snap, VIX is now likely to continue the uptrend based on the very momentum that led to the Bollinger Band snap. The pullback in VIX may not be complete, or more sideways action in VIX may be required. But given the momentum that was behind the Bollinger Band snap, the uptrend in VIX will likely continue, leading to higher VIX levels corresponding to lower SPX and NDX levels.

22 giu 2022

Commento

After the initial pullback to the 21 EMA that filled the gap on June 15, VIX rose a bit, and now it has pulled back again. The 21 EMA (daily) of VIX is at 28.87. VIX levels closed just above the 21 EMA of VIX at 28.94. Will VIX fall through its 21 EMA back to the upward sloping trendline (see chart above) where it found support on June 7-9? Or will VIX bounce from the 21 EMA and go back to tagging and breaking its BB around 33.98?

If VIX *closes* below its 21 EMA tomorrow, I will likely close shorts and wait for the next opportunity. If VIX continues to hold the 21 EMA on the daily, it will be worth continuing to look for short opportunities in the markets near term (i.e., next week) and /or going long VIX (either through VIX options expiring a month out or through UVXY shares).

24 giu 2022

Commento

VIX fell below the 21 EMA (Daily) today. But a key support level using Fibonacci analysis is 27.53. So far, VIX has held above 27.53 today and respected that as support. It will be very interesting to see if VIX proceeds lower or uses this spot as a place to reverse back higher, continuing the uptrend in volatility suggested by the Bollinger Band tag and snap last week.

24 giu 2022

Commento

In the below chart, I have drawn Fibonacci projections using the first move down (similar to a wave A in EW analysis) and projected that move from the start of the second move down (similar to a wave C in EW analysis). The 100% projection area = 27.53.
I'm watching this area intently to see whether it holds and turns VIX higher. If it does hold, and VIX turns higher, this suggests weakness and selling in markets in the near term. If it does not hold, then VIX may experience a more extended pullback to one of the uptrend lines shown in blue, which implies further strength in markets next week.