Upside Down VIX World

In last week’s ‘Tickling The Dragon’s Tail‘ I mused about the possibility of a VIX Buy Signal on the horizon. Which was followed by a sideways session in the S&P 500 with the VIX actually dropping lower. At the same time the VIX:VXV ratio pulled > its upper second standard deviation and all that means that the fun and games are just about to begin this week. Confused? I don’t blame you but as usual the ole’ Mole’s got you covered:

For starters let’s cover the VIX buy signal for all 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 three events in succession a major reversal in equities (and the VIX of course) usually occurs within a week. Obviously the buy/sell directions are relative to equities, not the VIX, but of course implicitly a buy signal in equities is a short signal on the VIX side.

Basically at this point we are one step away from a bonafide VIX buy signal. Which makes no sense whatsoever as we haven’t even seen a downside correction preceding the unfolding formation on the VIX. So what the heck is going on?

What IS going on is that 30-day implied volatility has been pumped in relation to quarterly IV as expressed by the VXV. And as you (may) know that means that pertinent ETPs need to keep up as they are constantly adjusted based on a VIX futures ratio as reported by the S&P Short Term Index. By the way there are probably less than 500 people in the world who are following IV as obsessively as I do, so what I’m sharing here is not commonly known even among professional traders.

Anyway, all this brings me to what shall be known as the ‘taking candy from a baby trade’. I can’t do it for free however so if you’re a stingy hold out then here’s your opportunity to finally step it up and cross out one of your New Year’s resolutions – i.e. reward the Mole for all the hard work he’s generously posting here on a daily basis (hint: that means signing up for a Gold sub or better):

It's not too late - learn how to consistently trade without worrying about the news, the clickbait, the daily drama and misinformation. If you are interested in becoming a subscriber then don't waste time and sign up here. The Zero indicator service also offers access to all Gold posts, so you actually get double the bang for your buck.

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