VIX: A Death Cross

This morning, VIX’s 50-DMA passed below its 200-DMA — a death cross.  If it holds, this marks the end of the period following the golden cross on Nov 1.  For the uninitiated, a death cross is typically bearish for VIX, bullish for stocks.

We must use a qualifier because death and golden crosses in VIX are notoriously susceptible to head fakes.  Of all the times the 50-DMA (blue line) dropped below the 200-DMA (red line) in the chart below, every single one resulted in a continuation of the bullish trend. But, not all resulted in immediate spikes higher.

Contrast that with golden crosses, where the 50-DMA rose up through the 200-DMA.  Every one was followed by a sharp and rather immediate drop in stocks, usually resulting in an important bottom within a few days.The head fakes are labeled with white arrows — with the most notable being the period following the US presidential election in Nov 2016 when (among other actions) VIX was hammered in the midst of a 4.5% selloff in futures in order to prevent a correction.  The ruse resulted in a class melt-up that lasted until Feb 2018.

There was one notable head fake which resulted in stocks dropping. In December 2015, the spread narrowed to as little as 0.12 over the last several weeks of the year.  When the two finally diverged again, SPX plunged 271 points (13%.)  Interestingly, the plunge occurred after SPX experienced its own golden cross head fake beginning Dec 24.

Investors have been looking for a sign as to whether or not the bounce which began with the PPT’s latest maneuver on Dec 24 can continue. VIX’s death cross is as good a signal as we’ll find — certainly more important than BA.

Although it represents about 11% of the Dow, all it’s doing right now is signalling the algos to try harder to prop up the rest of the market. continued for members


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