Thursday, January 15, 2015

VIX/VXV Above 1.0 - We Will Either See a Bottom or a Swift Sell Off

Yesterday the VIX/VXV ratio closed above 1.0 again.  I have highlighted this many times on this blog and you can search for that term on my blog to find prior posts and info on VIX/VXV and its significance.

Basically the market is at a state or near term heightened volatility.  There is an increase in "fear" or substantial near term volatility priced into the options market.  There are two outcomes that basically always occur after these signals.


  1. A significant bottom is quickly formed which often leads to a substantial rally and an important lasting low occurring in prices.  Often times from the first VIX/VXV close above 1.0 to the low of the correction is just a matter of a day or a few days.
  2. There will be an increased near term volatility with even greater % price losses than have yet been seen in the current correction.  

In either case, price may be near a low in terms of time.  But in the second case there may be a very significant downward price move prior to the low.

My personal perspective here is that with yesterday's VIX/VXV ratio above 1.0 concurrent with a price reversal in the session, a break of yesterday's low would basically be a "failure" of a bottom attempt and would be a sign of significant caution for bulls.  I would advise that if Wednesday's low is broken, a trader either be flat and awaiting another price reversal bar at a new corrective low, OR be short with a stop no higher than above the Jan 9th high.

If prices do continue lower from here I will be likely be more active in posting here in order to help you pinpoint upcoming market turns as they develop.

That being said, unless Wednesday's low is broken, yesterday was a bullish signal in the markets.


Pete

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