Friday’s pop did, indeed, drop as expected. The purple channel held for a bit, but eventually gave way to a near miss on closing the latest gap.
The equivalent 1.272 for SPX is 2073.28. As we discussed yesterday, TPTB have been running indices up near, but not quite to, natural reversal points — mitigating the odds of a reversal during market hours. Keep an eye on ES, USDJPY and NKD as SPX approaches 2073.28. If they start inching lower, that’s what you should expect to happen today.
The mild surprise was that the reversal took place on an OPEX trading day rather than over the weekend.
Central banks are picking up the pieces overnight, with USDJPY ramping and treasury futures monkey hammering. Futures are showing up 7 points as of this writing, so SPX will get another shot at backtesting the broken purple channel (2065ish) this morning.
Between two Fed surveys, central banker soundbites, VIX smashing, etc. 2073.28 is back on the table. The question is “when?”
Over the past year or two, holidays have been saved for breaking through strong resistance. It’s easier (meaning less expensive) to buy up a few thousand e-mini contracts than forcing the whole market higher during an active trading day.
So, what big prizes are out there that would be easier to bag in the next few days? We’ll take a stab, including what might lie ahead for the rest of 2014.
First, note that while stock sell-offs continue to be mild to non-existent, volatility as measured by VIX has continued to rise since July. The spike in mid-October was a reminder of the underlying bearishness out there. But, the speed at which VIX plunged from 31 to under 13 was highly unusual.
The long-term chart shows just how unprecedented it was. Let’s look at the past 20 years as a big channel, shown below in purple. There have been three instances where VIX rose from the bottom to the middle of the channel: Dec 95-Jul 96, Feb-Aug 07, and Jun – Oct 2014.
In 1996, it took VIX 31 weeks to get to the channel midline. It took it 7 1/2 years to fall back below the 25% channel line. In 2007, it took 24 weeks for the rise, and 3 years for the fall. This year, it took 15 weeks for the rise, and a mere 4 days for the fall.
- The rapid rise was very far off-base, and the fall was a return to rational thought.
- The rise was very much justified, and the rapid fall was off-base.
Without devolving into a debate as to what constitutes “rational thought,” I think it’s fair to say that unprecedented moves in a so-called fear index are strong evidence of a change in the very dynamics of the market itself.
The fact that VIX is currently perched quite precariously on a TL connecting the past 5 lows dating back to Jul 3 should make any bear nervous.
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