Click on Chart to Enlarge
The chart above shows the last 2 years of VIX/VXV daily closing ratios. I have discussed this many times on this blog, but when the ratio exceeds 1.00, that is basically a theoretical imbalance in the market, and it usually resolves to the upside before too long.
However, I have also discussed the fact that while it may be a short time until a relative low occurs, these increasing volatility environments can lead to dramatic price declines in that short period of time until a price low occurs. So I don't suggest necessarily just buying with no further confirmation that price may reverse or with no defined risk.
With the current set-up in the stock indexes I believe there are a couple highly probable scenarios:
1) Prices sell off sharply, maybe VERY sharply for a few days, and then we start a significant multi day rally
2) We see a brief lower daily low within the next couple days, followed by a rally attempt
Currently, my analysis is that we are nearly 100% certain to see a lower daily low than Friday's, but we should be aware of the buying set-up with this volatility imbalance.
The intermediate term price logic has been behaving in downtrend fashion off the recent highs, and so for short-term traders the play is to look to short rebounds until a buying signal occurs.
If I had to take a stand on the larger market direction from here, I would say that I think this market has seen a more significant high than the others over the last year and a half. However, objective signals are the key to success, so I could change my mind at any time when those occur.
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