IF IT'S BROKE VIX IT
After last weeks break in stocks, let's look at whether or not this is a buyable dip or a top?
The VIX is a widely used index nowadays in evaluating what the likely next market move will be. I do believe it is perhaps the best single thing to look at when determining if the market overall will rise or fall in the next couple of weeks. I have a chart of it above, and it is my contention that you should analyze this just like any other individual market or stock. You should use technical indicators on it just like you do on a regular chart. My chart above has the usual suspects plotted below the VIX itself.
One thing that should jump right off the chart at you is the very sharp two day upmove in this index. As far as a regression analysis would go, this is a prime reversion to the mean scenario for today and or tomorrow. We have our momentum oscillators spiking sharply upward and when I combine them with the separtion of the VIX and my bands on the screen, I am hard pressed to find another situation quite like this that has occurred previously. There are some proprietary things I use that are not featured here that tell me this is a dip to be bought for a reaction move, but they are not cut and dry. This very sharp move here is somewhat troubling, and I think ominous. Most reversion setups do not look like this at all.
I think we can explain that with this being such a unique historical situation. The market has never been manipulated by the government to this degree since the VIX has been in existence. I believe that is why we cannot find comparable occurrences to this pattern. Since the VIX is a reflection of sentiment at it's core, and the market has not risen in concert with how it normally would in relation to sentiment, it makes sense that this would also be a little out of whack. What to do?
When taking all of this into account, here is what I have decided to do. I am not aggressively playing a bounce here, I am waiting for a day or two up possibly three, then looking to get aggressively short again. I am taking individual stock shorts that meet my rules. I think any bounce here is going to be short lived. For those who trade ETF's there are a ton of sharply oversold symbols that might be good for a day or two up. However, to me this just looks like something that is going to move lower.