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 .