There are very few charts which tell the story of this market as dramatically as does VIX’s. The most noticeable pattern is the falling purple channel which accurately signaled its highs and lows between Nov 2015 and Jan 2018. But, this falling channel conflicted with a much larger rising yellow channel.
In the wake of the US election, VIX had a decision to make: bounce off the yellow channel bottom again (meaning stocks had peaked) or continue following the purple channel lower (supportive of new highs.)
The bulls won out, as VIX spent more than a year dipping below the yellow channel bottom (arrows), occasionally setting new lows whenever stocks were in trouble. Suddenly, in February 2018, VIX exploded out of the falling purple channel and retraced a Fibonacci .886 of its drop from the Aug 2015 highs — resulting in an 11.8% correction for SPX in only 6 trading days. SPX would go on to test its 200-day moving average — something it hadn’t done since the US election — eight times between Feb 9 and May 3. VIX was supportive, settling lower in waves. But, SPX remained mired in a downtrend, unable to break out of a falling channel it had been in since its January highs. Finally, after SPX tagged its SMA200 on May 3, VIX plunged dramatically from 16.92 to 10.91 in one day. Actually, the plunge lasted a matter of minutes. But, it was a very powerful signal to the algos (and, any carbon-based traders paying attention) as it dipped back into the purple channel and below the yellow channel bottom.
Three sessions later, VIX dropped through its SMA200, something it hadn’t done since Jan 23. SPX loved it, and quickly broke out of its falling channel.
As stocks approach our next upside target, it would be prudent to keep a very close eye on VIX. After reaching the purple channel again, it has a fresh choice to make: re-enter the falling purple channel and resume violating the yellow channel bottom to make new lows, or bounce off it and give stocks an opportunity to properly correct.
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