HEAD AND SHOULDERS

Here we have the VIX index with a very well defined pattern in it suggesting it could be making a low here. Anyone reading this blog certainly knows what a head and shoulders pattern is, and it could not be more clear that we have one here. If we accompany this with the momentum oscillator moving higher, it is telling us that a low could be in the making here. Of course in general this trades opposite of the stock market, but not completely. We are staging at this moment one of these dramatic intraday reversals of a sharp down opening in the SP 500 which is what happens in strong trends. You can see here that we gapped up and are moving down pretty quickly in the VIX, opposite of what stocks are doing.

It is my contention that watching for patterns in the VIX is the best way to catch short term swings in the stock market. As in anything else, there are a million ways to trade, so it just depends on what your individual approach is as to how you use this. One thing you should not do is use absolute levels in this index. At one time there was a school of thought that every day we went beyond certain levels, the market had to reverse, and that turned out to be a poor use of this index. I think just looking for trends in it, and reversal patterns, are the best use. I like to try and trade the VXX in concert with this but they are shockingly dissimilar alot of the time, so the patterns are often not the same. When they are not the same, I don't take the trades. In this case the VXX was on it's multi-week low while this was making a higher low, so I did not do that trade. I don't like to buy things just going straight down making lower lows every day (chart below).

Overall I think we are very close to a short term sell signal in stocks within the next day or two. However, with the FED pretty much stating indirectly they are not going to let stocks decline, we really have to be looking to buy the dip aggressively when it comes. This does not mean just blindly, but when the next buy signal shows up it is likely time to put more chips than normal on the table.