Monday, May 4, 2015

VIX Shows S&P Ready for an Unpleasant Surprise

The CBOT VIX index trades 0.1 higher to 12.80 as I write, having earlier recovered nearly half of the decline from Friday’s session and appears in the process of creating a ‘bullish hammer for the session should the VIX remain near current levels into the close.  Following the VIX with exaggerated interest since early 2013, I have long believed that a period of relatively modest but continued S&P equity gains were likely to follow the mid-2014 closure of a bullish window dating from April ’13.  


Since early 2013, the VIX has experienced some decent upside spikes, but the S&P has survived without even a 10% correction since April 2011.  And while no 10% correction is expected in the near future, I suspect the VIX is signaling for a recovery which would imply some jumpy and likely bearish price action in S&P’s.   


One fundamental reason for expecting a ‘sell-off event’ in the S&P is the still undecided nature of Fed monetary policy.  Until it is more widely understood that the Fed will initiate its ‘normalization’ in the near future, markets in general are subject to volatile trade brought on by excessive uncertainty.  Indecision and uncertainty is not the friend of bull trends in equity markets.    


Technically, I would point to today’s potential bullish hammer, which has made a new 7 month low from which it has recovered.  Additionally, there is a ‘bullish inverted hammer’ from April 24th that is impressive.  Finally, I would note that since early December 2014, there has been a ‘bullish window’ that has been left open.  The nearest the VIX has come to closing this window, a sign that the bullish support has been extinguished, has been over the last 8 sessions (roughly 2 weeks).  The inability to close this window is further indication that VIX bullish prospects exist. 


Given the long standing survival and bullish implications of the ‘bullish window’ combined with subsequent bullish reversal indicators, the risk appears to have grown for a move higher in the VIX.


More generally, the S&P Index had a decent selling event on Thursday, April 30, from which it recovered in short order.  The lead up to that S&P index decline was consistent with more troubled conditions that may not have been put to rest with that 48 hour event.  Instead, I see the steady advance into April 24 and that session’s break and settlement above longer standing resistance as quite constructive.  The inability to make good on that bullish context left a serious question mark hanging above S&P’s.    


That period, having set conditions for a more aggressive advance which did not materialize continues to threaten trade today.  Having failed to take advantage of their position in late April, the long contingency will more likely discard long positions on the return to prior resistance than muster resources and push the index to meaningfully new highs.    


The 16 day April VIX 15 17 call spread is priced toward 0.35.  This low risk call spread is a good vehicle should the VIX jump over the coming days.      

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