The Gift That Keeps On Giving
Of course I’m referring to the one setup that has consistently been banking us profits for years now:
The VIX buy/sell signal – just like bidets much misunderstood for some reason – continues to be one of our most profitable setups. And this time was no exception. The first warning was triggered at VIX 46 and we got confirmation at 38 two days later – a textbook setup. Now it’s dropped over 30% and is hovering around 30, the invisible Maginot line that separates the bear from the bull. Of course if we push below 28 we may just see a VIX sell signal (noobs – it’s relative to equities, so don’t get confused) which wouldn’t be surprising considering that we are heading straight into the Gobi desert of volume. More on that in yesterday’s update.
But the VIX is so retail – I can do you one better – please step into my office:
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The CBOE SKEW index hasn’t been available on the TOS platform for long but it’s now accumulating enough data to actually make out some patterns. Yes, I do have a lot more data on my Excel sheet but, frankly it’s so time intensive – at least for me. In any case I decided to slap the same 2.0 BB on the SKEW and low and behold – we are seeing similar patterns, this time directionally oriented with equities. Remember VIX is what retail traders look at – SKEW is for the pros. If you have never heard of the SKEW, then let me give you the skinny as I covered it in a previous post:
The SKEW is sometimes to referred to as the SIX or black swan index. It was introduced by the CBOE in February 23rd of this year and measures out-of-the-money S&P 500 options to determine the risk of unanticipated, or Black Swan, events threatening the market. The Black Swan reference, of course, is from the Nassim N. Taleb book of the same name that, in part, delineates the importance of low-probability but catastrophic events in financial markets.
Formula: The SKEW measures the implied volatility between OTM puts and calls and derive a numeric value from the difference between the two – I call it a delta. Like the VIX, which measures volatility across the S&P 500 spectrum, the higher the SKEW number, the more the danger of what traders referred to as tail risk – or occurrences that occur farther out on the edges of the traditional bell curve.
Short Description: Front month OTM put/call IV delta.
Again, I strongly suggest you re-read my more comprehensive post on the subject – it’s worth well your time and even if you did you may want to read it again as a general refresher.
The spoos hit a NLBL last week and are now very near our first target – again coinciding with the low-vol patch I elaborated on yesterday. I’m not going to call a top but 1240 ought to be good for a bit of a reversal. Of course if we continue higher without a correction then the bear dies somewhere around 1260.
The weekly SPX chart is now officially triggering a NLBL – we do have two more sessions to go and it’s possible that we reverse and dive back under. But that doesn’t mean we won’t try again in week 42 or 44 – as you know I’m expecting a bit of a reversal in week 43. If you want to know more about that ask friend of the blog Chris Carolan.
The monthly SPX is now pushing above both the 100-month and 25-month SMA – that’s pretty bullish if it can hold on here. Next cluster of resistance somewhere around 1250 – which nicely ties into 1260 being the inflection point where the bears drop into a shallow mass grave.
As I predicted yesterday (and so many times before) the real action was over on the FX side – and boy, did we see some movement overnight. The AUD/JPY was a harbinger of things to come today on the equities side. Seems like it’s smooth cruising now all the way into 81+.
Same story on cable (GBP/USD) – after tickling those NLBLS it painted a beautiful inside candle, which Scotty will kick himself for missing out on. Now we’re off to the races and I have 1.6 in my sight.
Those are not the only FX pairs of interest – in essence all the setups I presented yesterday have now broken out to the long side – and massively so. Anything with USD as the base currency is getting stomped on today. Commodities are pushing higher across the board. The writing has been on the wall for a while now and what is apparent to everyone else after resolving to the upside was controversial analysis in a very bearish climate just over a week ago 😉