VIX has been particularly active in pushing stocks higher, lately [see: VIX, Just Another Tool.]  So, as it approaches the channel bottom that has connected three previous lows, we’ll take a look at those previous instances to see what they suggest going forward.

continued for members…

Note that each tag was followed by a significant decline in SPX — though some were more significant than others.

The July 3, 2014 tag saw SPX hit highs of 1985.  But, that wasn’t the top.  SPX angled higher, holding a TL all month until falling through on Jul 31 for a 4% decline from Jul 3.  Not bad.  It then ramped up to 2019 before finally running out of steam at Sep 19’s OPEX and plunging to backtest the 1.272 at 1823 on Oct 15.  All in all, an 8.3% decline from Jul 3.

The Aug 5, 2015 tag produced a more memorable drop.  After topping out near the 1.618 Fib at 2138, SPX was backtesting a broken TL and putting in what turned out to be a right shoulder for a H&S Pattern.  SPX reached 2113 that day, and had plunged to 1867 by Aug 24.  All told, an 11.6% correction in only 13 sessions.

The Aug 9, 2016 tag was a special case.  SPX plunged 122 points (-5.8%) following the Brexit vote before central bankers rescued it by ramping USDJPY by 8.6% and hammering VIX from 26.72 to 11.4 (-57.3%) over the next 3 1/2 weeks.

As the momentum waned, they gave it another boost by depressing VIX to 11.2 on Aug 9.   It boosted SPX to 2188 and bought them some time, as SPX held 2170 through Sep 8.  On Sep 9, it gapped down through support, reaching 2119 two sessions later (-3.2%) where it bounced for six weeks before pushing lower to 2083 by Nov 4.  Total dip from Aug 9: 4.8% over nearly 3 months.I consider this last case the most important, as TPTB seemed to have finally gained complete control of VIX, fully utilizing its ability to drive algos that very likely saved the “market” from what could have been a very significant downturn.

It’s true that each tag of the channel bottom signified the approach of a turning point.  But, that capitulation always took at least two weeks, and the results ranged from mild to dramatic.

Our analog calls for a new, interim high of 2223 around FOMC day, Dec 14, which at nearly two weeks from now would be in keeping with these three previous instances.  A 3.2% dip in the wake of the FOMC action and in line with the least of the above declines, would leave SPX reasonably close to our 2163 target on Dec 15.

A 5% drop would take it to the bottom of the rising purple channel it’s been in since its Brexit lows in June — around 2115, not far from the current SMA200.

From there, our analog suggests a push higher into early January.  Only the Aug 2015 VIX tag didn’t produce a higher high before the big plunge.  So, again, this seems reasonable.  If TPTB are successful, that’s where the analog will begin to break down.  Instead of beginning a 57% crash as in 2008, it’ll correct a little bit as oil finds its lows in February, then push on to new highs as VIX tests the 2007 lows of 9.39.

If, instead, they lose control of VIX, CL, USDJPY, etc. then VIX will get a strong bounce off the yellow channel and we’ll have a very interesting 2017.

Stay tuned.