Of all the tools central bankers use to support stocks, VIX is perhaps the most useful. Frequently, a breakdown in VIX has been used to signal algos to push major indices above significant overhead resistance such as a major Fibonacci extension or channel top.

We last noted this phenomenon back in April when SPX was pushing up against its 3.618 Fib extension at 3956 [see: Irrational Exuberance and You.]  Sure enough, VIX broke down through the falling purple trend line (#3 above) and SPX sliced through the resistance.

It’s significant because once again VIX faces an important test of support, the bottom of the channel from 2017. What it does here will determine whether or not the rally can continue.continued for members…There are a couple of different ways to look at the situation, with a bullish (for stocks) scenario that calls for the purple channel to break down.

The bearish viewpoint calls for a significant bounce and much higher VIX going forward.

There are a couple of important observations to make regarding the weekly chart above.  The first is that the large yellow channel has risen at a constant 11.5% per year since the 2009 lows, the second steepest rising of the past 90 years.

But, it doesn’t take a  lot of imagination to see that this above-trend channel is going to run into the top of a much larger channel dating back to 1929 which includes the 2000 top.

A closeup suggests the smaller rising yellow channel will intersects with the larger one (currently at 4850) at around 5600 around the end of 2023.But, as noted above, SPX is already bumping up against the top of the smaller rising yellow channel from 2009. It is doing so within a smaller, much steeper rising white channel rising at 40% annually which could get it to the top of the larger channel by Oct 1, 2021 – if it breaks out of the yellow channel from 2009.

By making new highs yesterday, it suggests there is no 3.618 backtest coming in the near future. A backtest right now would come dangerously close to a breakdown of the white channel.  If it remains in the rising white channel and doesn’t break out of the yellow channel, it will have a make a decision by mid-September: either break out of the rising yellow channel or the rising white channel breaks down.

Which way it goes will almost certainly rest on whether VIX breaks down or not.

Have a great weekend.