A Rare Apparition

An old friend suddenly showed up out of the blue yesterday and I’m not talking about a contributor who had washed out and, after years of ‘working for the man’, decided to return for another whack at beating the market. Instead I am delighted to report that I am looking at a bona fide confirmed VIX sell signal which we haven’t seen for ages here.

 

old friendsHello, old friend. Professor X and Magneto staring each other down in the plastic prison.

 

As a matter of fact it’s been so long that I actually had to and google my own blog in order to find it. Turns out the last time I reported a rare sighting such as this was on March 15th 2012 AD.

If I recall my history correctly that was right after Napoleon pushed the Romans out of Vienna at the battle of Dunkirk. Give or take a century – historical records are vague, as they have been corrected to satisfy political correctness and to protect the feelings of innocent snowflakes. After all we wouldn’t want the terrorists to win.

 

1-VIX_Sell_SignalA rare sight in recent years: a genuine VIX sell signal (its anatomy is explained further below). With systematic strategies having huge equity exposure, and record net long options and futures positioning by speculators in several stock market indexes, such a signal should give everyone pause – click to enlarge.

 

On to business: The perpetual confusion surrounding VIX Buy or Sell signals has always served as my personal pet peeve, triggering intermittent bouts of insanity, characterized by  foaming at the mouth and throwing rotting vegetables at innocent bystanders. In fact I have never ever seen a set of three simple rules being so consistently twisted, mangled, or misinterpreted.

One may postulate that a trivial set of three rules could not possibly be confounded by anyone capable of handling a TV remote control, but such an assumption would most surely be made by a sheltered 40 year old virgin unfamiliar with the murky morose mind of the average retail trader.

As I am not one to insult my target audience on a whim (as a matter of fact I have spent a many years refining my skills), I thought it best for all parties involved to forestall any further confusion on the subject matter by reiterating the rules at hand. Which by the way have also been preserved for posterity on our trusted cheat sheet.

This way, a few hundred years from now, when our mutated three legged ancestors dig through the charred remains that once stood as the pillars of modern society, they will be able to say: “Well, they were a bunch of self-centered infantile morons, but at least they knew about the VIX Sell Signal!

Now behold for thy sacred words of trading wisdom as foretold by a schmuck we have all long forgotten and couldn’t care less about, as long as it serves us to make another quick buck.

 

Anatomy of the VIX Sell Signal

For a confirmed signal you need not one, not two, but three events [this reminds us a bit of the holy hand grenade, PT]

 

  1. A close of the VIX outside of the 2.0 Bollinger Band (20-day SMA)
  2. A close back inside the 2.0 BB. This issues the signal.
  3. A higher close (sell) or lower close (buy) than the close of the day back inside the 2.0 BB – this confirms the signal.

 

Once you get those three events a major reversal usually occurs within the next week. Why is it called a VIX Sell Signal? Because the ‘sell’ part refers to equities – if we were all anal retentive or Swiss then it would be called a VIX buy signal, but alas, we now live in an analog gender fluid world and precise naming rules only apply Thursdays between 7:00 and 9:00.

By the way, the sell signals used to be far more accurate than the buy signals, but in the past few years that relationship has flipped, thus I think it is affected by the overall trend. Given that and clearly bullish medium term momentum, I would therefore not expect Sodom & Gomorrah to descend on us right away.

Instead it’s most likely going to be more of a rowdy Hillary or Trump national convention type of occasion (pick your poison). Anticipate name calling, occasional fist fights, and plenty of bruised egos – if necessary, state police will stand by in order restore civil disorder.

Before I show you how ride this unicorn into the sunset let me tell you the conditions that would most likely weaken or disqualify the bearish case:

 

  1. Weaken: A close above recent daily highs. On the SPX that means 2184 and most likely we’re burning higher. A drop from the upper ranges is still possible but less likely. In my experience VIX Sell signals do need to be accompanied by price weakness – maybe not back in the old days but most definitely since QE.
  2. Disqualify: A close of the VIX back below the lower Bollinger. Hey, I don’t make the rules, I just follow them (being German and all).

 

So there you have it – everything you never wanted to know about the VIX Sell signal and probably would have never asked.

 

How to Trade it?

So how do you trade this beast? Well, there are no clear cut rules but at the current stage I see three entry events you may want to take advantage of:

 

  1. You can get short here with an ISL above the recent highs, plus minus a few ticks if you like.
  2. Wait for a drop below the 25-hour SMA and all that Net-Line support, i.e. near 2175 with a stop above 2183.5 (current highs).
  3. Wait for a drop below the 100-hour SMA around 2172 – wait for a retest (a.k.a. last kiss goodbye) and then go short with a stop above 2181ish.

 

2-three_short_monkeysS&P 500 futures (ES), 60 minute and daily charts – click to enlarge.

 

Of course if we push higher here today or tomorrow then we’ll have to regroup. Many years ago some guy I met in a dive bar in Fairbanks claimed after a few beers too many that he once had seen two consecutive VIX Sell signals back in his early youth. He seemed legit but I started to have doubts after he tried to sell me some pictures of Bigfoot.

Happy Hunting.

 

Charts by: StockCharts, Ninja Trader / Evil Speculator

 

Chart and image captions by PT

 

This article was penned by the Mole and appeared originally at the Evil Speculator.

 

 

 

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2 Responses to “An Old Friend Returns”

  • SavvyGuy:

    Markets have a habit of making mincemeat of those who use the words “usually” and “used to”. Those are traps that provide the fuel for markets to move in the opposite direction.

    My words of caution to the wise: do not bother looking for “easy” cyclical patterns in fractal chaos systems to repeat, unless you enjoy being trapped by your own expectations.

    Sure…An Old Friend Returns, but this time it may be for your funeral!

  • wrldtrst:

    Read it.. thought to myself… Hmmm… I bet the market is not moving at all. Looked at SPX chart. Dead since July. Explains everything to me… directional trade off of this.. me thinketh not… Off to Tennis Center to watch some Olympics…

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