What if the VIX fails to move lower?

Divergence in the $VIX can mean ?

I usually don’t do much analysis in regard to the daily moves of the VIX (volatility index) when compared to the SP 500 ($SPX). Everyone seems to use it incorrectly so I stay away from the noise. But I do take notice at divergence and many of you know I love to trade counter tend for cash flow active trades or even longer swing trades off my model when I see blatant signals of a top or bottom based on diverging signals. In this case, the huge parabolic moves in the $SPX just might be walking on thin Ice up here near the 1690 levels IF the VIX does not show some sort of signs of moving towards all time lows based on the $SPX at all time highs. With all the hyped up “new market” environment and closing in on 1700 as every sell-side analyst lost in the shuffle calls for 1750 +, we just might see a total failure soon? Its almost too perfect of a scenario to go higher, exactly like AAPL at 700. Every sell-side  talking head called for 750 – 1000 in AAPL. It’s so sure to happen, it fails. This is what makes me nervous about the next leg up in the $SPX.  

So let’s examine what I’m referring to: The two charts below are the $SPX then the $VIX and notice that the $SPX is at all time highs and the relationship of the RSI to those previous highs. We can start to see the most current data is not quite confirming the move yet. but let me stress, YET. RSI can lag and give false reads in strong trends so we wont rely on this as our sole data point for comparison. And of course the potential projection to 1700 and beyond is what is being touted now.



Now the $VIX , in theory, should be making or near all time lows but we can see this is not happening by any stretch of the means. At least not yet. The lower  trends (blue arrows) are showing higher lows at key valleys since last March as the RSI sits at the bottom of the range and not really giving any clues to the next direction other than continued weakness in the VIX.



So what should we do? I’m still long STT and HAL so far as this market defies logic and still not giving any real solid signs of selling off. I will look for more signs of a top or near top in the $SPX and $DJI the next few days to weeks and we will revisit the moves of the $VIX to see if this indicator can show us more signs of an impending top signal. But for now, honor all stops and its not time to roll into short aggressively . 

Nick Pirraglia



About Nickolas Pirraglia

Nick Pirraglia started his career in trading in 1991 after returning to the US as an Army Officer deployed in Iraq. He began as a bond broker and worked his way into trading. Expert mentoring, hard work and a disciplined approach to the markets has allowed Nick the ability to maintain a very successful career in Capital Markets and Trading for over 20 years as a professional OTC Market Maker and independent trader. Nick has also managed the trading desks for a two Dallas based capital management companies and traded equities for a Dallas based hedge fund. Nick has trained and mentored thousands of customers in the rigors of trading, technical analysis and risk controls. Recently, Nick had broadened his market experience through the design and product management of two automated trading platforms. He has the pleasure of working with some of the brightest minds in the trading community and has collaborated with experts in data, design, engineering and trading psychology. An avid long distance runner, Nick completed several marathon events, qualified for the Boston marathon, completed several long distance Triathlons to include finishing a full Ironman triathlon.
This entry was posted in Trader. Bookmark the permalink.

3 Responses to What if the VIX fails to move lower?

  1. Pingback: What if the VIX fails to move lower? | TradersThinkTank

  2. James says:

    Good article.

    I’m seeing the RSI14 for the SPX as a lower high divergence here or also known as a failure swing. It suggests that the internal strength of this leg up is something to be wary of and could potentially running of upside juice.

    RSI interpreted and used in this way tends to produce more effective setups and results imo.

    • Agreed, but you how these signals can drag on for weeks until… BAMMM..it hits you. I’m not ready to take the short side yet as my longs are still hitting their targets. But if my system triggers new longs up here I will offset with SPY or IWM or both short side. Gotta protect that cash !

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s