VIX/VXV Ratio Still Elevated - This Rebound Will Likely Lead to A Sharp Sell Off and Retest of the Lows Over the Next 1-2 Weeks

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The snip above are the past instances when SPY closed up 3 days in a row and the VIX/VXV ratio was greater than 1.0.

The VXV has a limited data history, so this only picks up on a couple unique market environments in 2011 and 2015.

But I still view this as extremely relevant even without a larger data set.  The implied volatility structure still is imbalanced, and "fear" is present in the market.  As such, we may not be out of the high volatility daily swings of recent days, and the probability of a retest of recent lows may be higher.

This view would be consistent with the price cycle analysis tools i use which suggest upward price cycles will peak this week in the short term, before another 1-2 weeks of downward cycle pressure. 

None of the past instances led to a lower low below the waterfall decline low (last Friday's low in our case).  So they occurred in the context of the rebounds and restests of the lows following those vertical sell offs.

That is the probable position I see us in currently.

Since the VXV has limited history I scanned some conditions indicating big recent moves in the VIX and in SPY by using a high width of the bollinger bands as the backdrops for those scenarios of rebounds following a volatile price decline and VIX rise.

The take home was similar by adding in some more unique instances from the mid to late 1990s and a few in the 2000s era.

So from the past stats it appears probable that SPY could witness a sell off over the next 3-5 days of 3% or more from today's close at 266.  The closing low in SPY on the recent sell off was near 258.  And a 3% decline from 266 would put SPY at about 258.  So it seem like price could retest that closing low, possibly without a lower intraday low over the next week or so.

I plan to speculate with a SPY put option expiring next week.


Pete