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VIX Reversal Signal – Day One
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VIX Reversal Signal – Day One

by The MoleJanuary 12, 2010

Yes, I’m back – but my time is extremely limited right now – so without further ado I will present my case. Something very rare occurred today – an event that has not occurred for several months now:

Today represents step 1 in a technical pattern called a VIX reversal signal. To illustrate the pattern I have marked the sell signals in orange and the buy signals in green on the chart above. Since last summer we mainly saw VIX buy reversal signals – all of them concluded successfully. A VIX buy reversal is of course the inverse of a VIX sell reversal signal. The last time we got the former was on October 30th, at which time a certain analyst I won’t name here recommended to more or less ignore it as the market was supposed to continue downwards. I think this is one ignominious call he’ll have to live with as the ensuing bear squeeze wiped out a lot of his bearish followers.

For the noobs – here are the rules:

For a $VIX confirmed signal you need 3 events:

  1. A close outside of the 2.0 Bollinger Band (20-day SMA)
  2. A close back inside the 2.0 BB – this issues the signal
  3. A higher close (sell) or lower close (buy) than the close of the day back inside the 2.0 BB – this confirms the signal.

Once you get those 3 events a major reversal usually occurs within the next week. The sell signals are far more accurate than the buy signals.

Yes, that last sentence should make any bear hopeful – but it’s been the other way around in the past few months and that’s the reason I only loaded up on a very moderate amount of index puts right before the closing bell. Of course technically speaking I should wait until the confirmation, which is at least two days away – assuming we get it that is. BTW – why index puts? Only because I didn’t have the time to parse through my overbought filter and pick specific symbols. Well, let’s see what happens tomorrow. A close back inside the 2.0 BB would lead me to increase my positions size.

Understandably many of you are nervous about shorting this market – and rightfully so I might add. You can only get your dick caught in the elevator doors that many times until you start remembering to zip up your pants after taking a leak. But I have a very fundamental rule when it comes to trading. If I encounter a time tested technical signal that indicates a market reversal is in the making then I have to take it, no matter what. The day my emotions or a directional bias prevents me from following a statistically proven technical trigger is when I must retire from trading.

For what it’s worth: It would be nice to see a down day for a change – this market is getting on my nerves. I suffer from a mental condition that prevents me from doing what everyone else is doing, especially when it comes to trading. In the past few months everyone seems to be doing the same thing over and over again – and it’s working for them. That’s not how it has worked during 99.9% of the stock market’s history.

I’ll leave you with that to chew on.

Mole (some of you might remember me)

P.S.: The Rammstein notification module has now been activated – have fun :-)


About The Author
The Mole
Mole created Evil Speculator amidst the chaos of the financial crisis in early August of 2008. His vision for Evil Speculator is a refuge of reason, hands-on trading knowledge, and inspiration for traders of all ages and stripes. You can follow him and his nefarious schemes at various social media waterholes below.
  • http://evilspeculator.com molecool

    gmak – perhaps you can tack on your post to this one? Otherwise nobody's gonna see it…

  • http://www.lostinmendoza.blogspot.com/ biffermas

    Great post, Mole! I apologize for not stopping by here more often. Cheers to a VIX reversal.

  • elliott_surfs

    Yes, bollinger bands are now, thanks to the education here at ES, one of my favorite indicators.

    Yes, I have urinated in the corner of an elevator before.

    No, I didn't know you were watching.

  • string01

    Hey Mole good to see you.

  • mattco

    Thank you mole. I have nothing super intelligent to add to your great post except for the unusual activity in XLF options I noticed today. Someone traded 65,000 Jan $15 puts and 65,000 June $20 calls today at the ask. Strange spread if you ask me but I would assume (please correct me if I am wrong) that someone thinks that the XLF will be at least below $14.88 before friday and have very little chance of seeing $20 before June. Let me know what you think.
    On another note. I do believe that my dick is still caught in the elevator, so I guess I never learn. :-)

  • string01

    Mine gets caught in the escalator.

  • mattco

    You must be shorter than me. lol

  • toad37

    Long feb 22 vix calls. Great post Mole, thanks.

  • vision_invisible

    Waiting to say “it's on baby, it's on”…

  • string01

    hahahhahaah
    Bah-zing!

  • http://evilspeculator.com molecool

    Some nasty candles overnight – they're working hard to band the tape back up. Just saw a three handle jump in three minutes. There is no end in sight for this shit – fuckers.

  • http://evilspeculator.com molecool

    Did something just happen? Some kind of report being exploited by the night crew? Or why are we racing up like mofos right now?

  • LogansRun

    Some good juicy numbers must of been released somewhere. Time to ramp this shit up! It just never ends….

  • bananaben

    Good, this samurai is going to go kamakaze as we gap past 1150.

    http://www.youtube.com/watch?v=1d19BOhhU80

    Give me the opportunity fuckers!!!!

  • marketsniper

    Good stuff, mole. A new one on me. We live to learn. With you on the discipline. You get the setup, you take it.

  • http://evilspeculator.com molecool

    Yeah, but I have to admit that the usual overnight tape painting is starting to seriously get to me. Is anyone fucking regulating this market?

  • Darkthirty

    c of 2

  • bananaben

    Take it from Biderman – the PPT is all over it.

    http://www.businessinsider.com/trimtabs-ceo-the… ing-shares-because-private-demand-just-isnt-there-2010-1

  • spicestory

    Mole, thank you in spoting the rare VIX reversal. Could we use BB confirm signal onto each individual stock or an index itself by altering the 3rd event rule to be : – “A higher close (BUY) or lower close (SELL) than the close of the day back inside the 2.0 BB” onto each individual stock?

  • vision_invisible

    Intervention across the board. Ponzi action on the trillion+ of debt to be rolled over. Fed buying the market (me thinks) with ??? amount of funds.

    Regulation? They are here to plunder and save themselves in the name of saving us.

  • vision_invisible

    There will be short opportunities. But anyone who thinks we're going into deflation destruction and is waiting for gold at $700 again has closed their eyes to ample evidence of the commitment of our govt to ponzi/pump/extend/pretend.

    Stagflation here we come. Ready for QE 2.0 and Jobs, Jobs, Jobs from the Central Planners?

    Get yourself some physical as a hedge on your longs and shorts :)

  • boycottnow

    thank you mole

  • boycottnow

    yes, Government Sucks is regulating this market

  • sloth_bear

    Thank you mole, welcome back in your lair!

  • ultra

    Easy there – reversed twice as fast. Looks like a nice potential (i),(ii) down to me (hint: (ii) is a flat). If that's the case, you know what comes next.

    Gap down open would be tasty.

    :-)

  • CorporalCarrot

    So Alcoa made a penny (if we conveniently exclude 28 cents in charges), and has failed to meet expectations for 4 out of the last 6 quarters. Yet this industial bellweather, trades at $17. I don't need to work out the math to know thats a hell of a lot of future growth already priced in to the stock.

    Chart after chart tells the same story. So many stocks at dotcom-era valuations. And yet it doesn't seem to matter.

    This was epitomized by the sell-side analyst that Maria B had on CNBC before the announcement……..I don't know if anyone was watching it but it totally encapsulates what we are dealing with here. Prior to the announcement, he (like most of the market) was predicting Alcoa would beat expectations. Obviously they had a drastic miss, but after the announcement, when everyone was scrambling to find the logical reason why, they pan to this guy, and Maria put him on the spot.

    Would you still buy shares in Alcoa after this release? It might be my imagination but the guy looked distinctly uncomfortable, as he spluttered out that he would still buy the shares, and mumbled something about increasing demand, possibly china got a look in etc etc.

    This is what we are dealing with. Valuations across the board are discounting so much future growth, that technically prices should not move higher from here. But they quite possibly will.

  • CorporalCarrot

    Incidentally, as another sign of what we are dealing with, check this out;

    http://blogs.wsj.com/marketbeat/2010/01/11/alco

    It looks like Alcoa never announced 1 cent. They announced a 28 cent loss, but made reference to the fact that when this is excluded they made a profit. Everyone else has interpreted this as meaning 1 cent by virtue of the fact a profit > 0, and rounding obviously to the nearest cent.

  • jacksoo

    I think the best explanation is that the mkt pricing has nothing to do with fundamentals but everything to do with liquidity and speculation.

  • bobthehorse

    Personally, I think everything points to a Feb top around 1170. Looks to me as through macro data is picking up again, mkt not over-bought enough to get really technically bearish, yields have come back to comfort levels.

  • matsou

    wonderful tape right now :) 6 point drop in ES šŸ˜€

  • bobthehorse

    Is it my Disqus that is frozen or just no comments? We just went outright long.

  • http://www.vuepath.com vuepath

    Who is this Mole character? :)

  • kanur

    Some folks were talking about that SPG the other day. Seems someone really hates that stock.

    http://www.youtube.com/watch?v=sWx7Qmv3pDY

    I see some support at 74.

  • gmak

    http://evilspeculator.com/?p=14140#disqus_thread

    NEW POST
    NEW POST
    NEW POST
    NEW POST
    NEW POST
    NEW POST
    NEW POST

  • http://sshamster.blogspot.com/ Stainless_Steel_Hamster

    thanks mole, try the rodent bands on vix, theyshow someinteresting stuff

  • gmak

    oh ye of little faith. Looks like there are many overnight fans. I'll put a reference in my post.

  • http://dreadwinaard.livejournal.com/profile dreadwin

    Quick question: I'm searching for a description of the “rodent band” methodology. I see it referenced a lot recently?

  • http://sshamster.blogspot.com/ Stainless_Steel_Hamster

    first use mainly daily [stock]:$gold or [stock]:gld (for update intraday)

    then set up the following bollinger bands

    bb13,N.618
    bb52,.618
    bb 104, N.618

    N can be 1 or 2 (i.e. 1,618 or 2.618 for the second parameter) in each case you'll see

    the hamsters (N.618) are bounce or slide zones

    play a while and ask away with an example

  • http://www.bigmovingstock.com bigmovingstock

    “I suffer from a mental condition that prevents me from doing what everyone else is doing, especially when it comes to trading.” That was classic, lol

  • victorberry

    The $VIX gap looks like a steel bear trap that could snap shut and do more damage than those elevator doors.

  • http://trading-to-win.blogspot.com/ DavidDT

    minyans have no own analysts no more?
    where is Jeffy a la Depew?
    They have not been right for a loooong time huh?

  • http://trading-to-win.blogspot.com/ DavidDT

    minyans have no own analysts no more?
    where is Jeffy a la Depew?
    They have not been right for a loooong time huh?