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VIX At Support with Potential Divergence Forming

Should the $VIX (CBOE Market Volatility Index) move much lower, it will have printed the 3rd divergent low over the last few years. White arrows show the moves that followed the previous two divergent lows. As of today, the $VIX is challenging the June 7th reaction low, which immediately preceded the biggest jump in the $VIX (and associated market correction) since the previous divergent low & market correction that kicked off last October.

$VIX daily July 14th

$VIX daily July 14th

Should the $VIX fall much further, say to the S2 major support level around 11.80 & then reverse, that would most likely trigger a bullish crossover on the MACD, thereby confirming the third divergent low in years. On the flip side, the bullish scenario, which would be very likely if the stock market is headed much higher in the coming months, would be to see new lows on the $VIX with these potential divergences being negated by the MACD & RSI moving down below the March reaction lows. Something worth monitoring IMO.

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Jul 14, 2016 2:55pm|Categories: Equity Market Analysis|Tags: |22 Comments

22 Comments

  1. lee1 July 14, 2016 2:58 pm at 2:58 pm

    I welcome a market pullback so I hope this divergence turns out to be valid as I am starting to question the usefulness of these as indicators to help time overall market turning points.

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    • lee1 July 14, 2016 3:15 pm at 3:15 pm

      No disrespect but you have missed the rally of the century by following these wedges and divergences which only prevented you from going long many stocks.

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      • rsotc July 14, 2016 4:42 pm at 4:42 pm

        @lee1 I respect all opinions but I have to laugh when you refer to this recent rally as the “rally of the century”. I’ve been trading for many years & have profited both on the long & short side of both bull & bear markets and can say that even if you can allow yourself to take a leap of faith & assume that the US stock market (sans $SPX) is in a bear market that started last year, the relatively meager 8-10% rally that we’ve had off the June 27th lows probably would even register in the top 100 bear market rallies in recent history (as bear market rallies are notoriously powerful & very convincing to those that want to believe the worst is over). Even just eye-balling the major rips & dips in the market over the last two years this rally still pales in comparison to the 6 sharp near uni-directional rallies & corrections since the Sept 2014 highs. In fact, this rally is has only taken the market a mere 2% above where it was on June 9th when it topped shortly before the Brexit vote & correction. Far from “the rally of the century”, at least at this point.

        Now as far as the criticism about using divergences that you @snp have, I continually state in my videos in written posts that “no single indicator or TA tool is 100% in trading, not even close”. With that being said, I challenge you to find any technician out there, anywhere, that has been able to more accurate & consistent with identify major turning points in the market than I have. I consider myself a modest person but as you call into question my use of divergences in helping to identify future trend changes, here’s a chart of the $SPX along with my calls for a reversal at every major turning point so far this year (and I had to go back to Nov ’15 since that kicked off the big correction that continued into 2016.

        Again, these aren’t only calls for just market tops but rather every major bottom in the market so far this year (and you can take the time to go back years into my archives as you will see tops & bottoms called within days to hours and even minutes time & time again). Do I nail the entry on all of them? Of course not. Do I milk 100% of the run on each one? Occasionally but usually not & I am most certainly guilty of scaling back into my shorts too early on this current bounce. However, I think if you take the time to go over these & other past market calls you will see that I’m sometimes wrong and often early (more so on calling tops than bottoms which are much easier to reverse short to long at the lows) but rarely wrong when identifying major tops & bottoms using both divergences ALONG with other technical analysis such a trendline & chart pattern breakouts, candlestick patterns, support & resistance, trend indicators, etc..

        Here are the links to each of those top & bottom calls which again, all of which were dead on & all of which heavily but not exclusively relied on my analysis using divergences among other things.

        Nov 3rd market top: http://rightsideofthechart.com/us-stock-market-reversal-appears-imminent/

        Jan 20th bottom: http://rightsideofthechart.com/near-term-outlook-for-us-equities-gdx-gld-slv-video/

        Feb 11th (double) bottom: http://rightsideofthechart.com/qqq-spy-support-target-levels/

        May 19th bottom: http://rightsideofthechart.com/market-recap-for-may-19-2015/

        June 8th top: http://rightsideofthechart.com/pullback-in-u-s-equities-likely/

        And the most recent June 27th bottom: http://rightsideofthechart.com/iwm-small-caps-at-support/

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        • lee1 July 14, 2016 4:53 pm at 4:53 pm

          I appreciate your reply. It helps to put things into a bigger perspective, as you did, by pointing out your previous calls. In all honesty I was really referring to the last few months because I have not been with this site for all that long so was not aware of your record but given what you have pointed out, it does seem that there is merit to using the indicators that you focus on for trying to call market turning points.

          Over the last few months you had expected the market to fall and it has, for the most part, gone higher so I was starting to think that the indicators you use are not all that useful for trying to call THE top or even short term tops in what to me appears to be a very bullish market.

          I am hoping for a market pullback of any kind so I hope you are correct with your recent analysis.

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          • rsotc July 14, 2016 5:25 pm at 5:25 pm

            Glad that helped. Again, nobody is correct 100% of the time & yes, sometimes these wedges don’t play out or play out for smaller moves that expected. I think were you & others can find value in the analysis that I post, even if my bias is bullish when you are bearish or vice versa is in the key support & resistance levels, price targets & other potential inflection points in the market.

            For example, I still have a pretty high degree of confidence that QQQ will pullback to the 108.82 area & SPY to 210.83. It’s quite possible that IF I am correct, that I might extend my targets & expect more downside from there yet you, only looking for a decent pullback to add long exposure, could go long just above those targets or maybe place some protective stops just below.

            Part of the mission statement that I came up with when I started this site was to provide “Straightforward & unambiguous market analysis”. I strive to avoid C.Y.A. analysis in which analysis is provided discussing how the market can either go up or down & then jump on whichever of those two scenarios play out. I think we’re all smart enough to know that the market or a particular stock may do exactly the opposite of what I or anyone thinks. Therefore, if I have a strong enough opinion to formulate a bullish or bearish bias, that is the case I will make, even at the inevitable risk or eating crow sooner or later when wrong. I respect all opinions, especially those that differ from my own, as the last thing I want here is everyone posting the same analysis & expectations for the market. I just ask that everyone share their views in a constructive & civil manner, ideally with supporting evidence, be it their own or links to other articles, charts, etc…

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        • lee1 July 14, 2016 5:16 pm at 5:16 pm

          And as far as the rally of the century I meant since the low 1800s. And to be fair you called the low 1800s a buy I believe (I was not a member then but subsequently looked to make sure you had called that correctly back then) so not like you said the market would just keep tanking like many bears did. And yes I realize you are bull and bear depending on the chart and not a perma bear and simply play things out the way your indicators tell you to play it be it being bearish or being bullish.

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          • rsotc July 14, 2016 6:48 pm at 6:48 pm

            My mistake then. Yes, the rally off the 1800 lows in SPX has been a monster. Kudos to anyone that had the foresight & gumption to step in and buy there (the easy part IMO) and hold until now (the much harder part).

            Funny, just last night @snp pointed out a glitch to me that he noticed when viewing the Completed Long Swing Trades. All the tickers were up at the top of the page in the ‘symbol cloud’ for the completed trades where you could click them to see all related posts but underneath only showed the two posts for the SPXL long trade back in Jan. He pointed out that was it was a bummer because had I not set the official stops much so tight (especially considering the 3x leverage) that one would have been much higher today. That trade was entered the morning of Jan 20th (just off the first of the two 1800’s lows earlier this year). Although my targets were only for a bounce trade targeting a gain of about 16%, the entry was right off the lows with SPXL about 70% higher today, even with all the decay suffered from the back & forth price action since.

            SPXL entry off the lows: http://rightsideofthechart.com/spxl-aggressive-long-entry/

            SPXL stopped out but commented that it still looked good: http://rightsideofthechart.com/spxl-official-stops-hit-price-targets-still-likely-to-be-hit-soon/

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  2. alshaw July 14, 2016 3:29 pm at 3:29 pm

    man you guys are hoping no short you will lose all your cash no shorts

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  3. snp July 14, 2016 3:31 pm at 3:31 pm

    I tend to agree with lee1 about divergences. they can go on and on and on. I much prefer trendlines, candle patterns, and Fibonacci to find levels. the key is multiple signals as always.

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  4. jameske July 14, 2016 5:22 pm at 5:22 pm

    @rsotc Hi Randy, did you trade the bounces in the market long and short between Nov 3rd and end of December before the final waterfall to Jan 20th? Just curious if you held short that length of time, using the bounces to add to the short positions before getting out around Jan 20th?

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    • rsotc July 14, 2016 5:45 pm at 5:45 pm

      jameske- I don’t remember all the details but I do recall that period leading into the end of the year as extremely frustrating with stops clipped on several trades, both long and short and very few reaching my preferred profit target. I know they took out some of my swing shorts before the 2106 kicked off but I definitely came into the new year net short & then added on both the New Year’s gap, which was a very technically significant gap as the leading index at the time, the $NDX/QQQ, gapped down below the big late 2015 sideways trading range. I even recall posting the backtest of that range the following day which in proved to be the final objective entry before the bottom fell out of the market: http://rightsideofthechart.com/qqq-backtests-consolidation-zone/

      Basically, the last few months of 2015 were extremely tough trading for me as have been the last few weeks & to the best of my recollection, I wasn’t adding much, if any short exposure at the top of the range in December as by that time, I had recognized the fact that the market was in a tough-to-trade sideways range that could break either way. Plus, I typically try to avoid open new positions in December as trading volumes plummet (which makes it easier for the big boys to engineer stop-raids) and I take time off around the holidays.

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  5. snp July 14, 2016 7:05 pm at 7:05 pm

    I think it might be valuable to examine that bottom and this whole 20% rally and look for clues as to what set this thing up.

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    • rsotc July 14, 2016 8:21 pm at 8:21 pm

      snp- It took me a while but I think I finally figured it out. Do you happen to believe in the power of levitation?

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    • rsotc July 14, 2016 9:22 pm at 9:22 pm

      All kidding aside, as “mighty” as the 19.5% rally (so far) in the $SPX seems and given, that sole major diversified (more than 30 stocks) index has broken out to new highs, the charts below are a quick visual that indicates, assuming the markets reverse soon (still a big IF), so this has been nothing but a run-of the-mill bear market rally.

      Also don’t forget about those magic divergences. It wasn’t in hindsight that I pointed out the bullish divergences that immediately preceded that big rally in the $SPX, rather I pointed out the fact that we had bullish divergences forming on the daily time frame the very day the market bottomed on Feb 11th, just hours before the $SPX made the marginal new low needed to put a divergent low in place & then reversed, thereby causing a bullish crossover on the MACD & confirming both the divergence AND the bullish scenario (a reversal off that level) that I was leaning towards as discussed in this post: http://rightsideofthechart.com/qqq-spy-support-target-levels/ (admittedly I had underestimated the magnitude of the bounce that would follow).

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  6. roguetraderone July 14, 2016 9:35 pm at 9:35 pm

    First and foremost, hello to everyone. Ok, I think I am seeing things and just trying to confirm my bias (short). I am new at this and i’ve probably screwed things up like the divergences I have pointed out and the chart is messy. Sorry about that. I would certainly like any opinion (nicely please, remember newbie here!) including ones that would correct the trends and such I have shown, I would love to see a counter or corrected chart! This is what I see:

    1. The 2007 Peak was preceded by bearish rising wedge.
    2. The 2007 Peak occurred inside megaphone pattern, supposedly rare.
    3. The 2007 Peak occurred as a bearish rising wedge within the megaphone pattern.
    4. The current Peak (if it is one) has the characteristics of all three above.

    I hope these links work. If not please let me know how I am supposed to do this.

    2007
    http://stockcharts.com/h-sc/ui?s=$SPX&p=D&st=2006-10-01&en=2008-06-01&id=p10221432307&a=467654800&listNum=1

    Now
    http://stockcharts.com/h-sc/ui?s=$SPX&p=D&yr=0&mn=10&dy=0&id=p85004713424&a=466601921&listNum=1

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    • rsotc July 15, 2016 10:28 am at 10:28 am

      @roguetraderone – Those links worked fine. Your comment with those links didn’t show up on the site right away because as a security measure to prevent spam, any comment with multiple links is held for review until ok’d by a moderator (me). Yes, I do see the similarities in your charts. Doesn’t mean that it will play out the same way again but it certainly could..something to watch. Thanks for sharing.

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    • GetItRiight July 15, 2016 10:43 am at 10:43 am

      Nice find. Worth watching and welcome to the site.

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    • roguetraderone July 15, 2016 11:46 am at 11:46 am

      Thanks for looking it over Randy. And perfectly understandable on the delay. I figured it was because the my post was not relevant to the conversation and for the most part it wasn’t I just wasn’t thinking at the time. Looks like price has broken the trend on the S&P hourly, I hope it doesn’t bother with a back test. Also picked up VIXY yesterday for a quick trade.

      GetItRight, thanks! I sure hope I did get it right. Glad to be on board.

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      • rsotc July 15, 2016 1:31 pm at 1:31 pm

        roguetraderone- Nope, it was only the multiple links that triggered the automated filter to hold your comment for review until I had a chance to approve it today. I don’t personally filter, delete or edit anything that members post here (unless it is clearly offensive to some) & if there is a violation of the Terms & Conditions , I prefer to contact the offender directly via PM or email. I just ask that everyone keep the discussions civil without any personal attacks, keep the posts on topic meaning financial markets/trading/investing related.. no politics, religion, or any off-topic stuff other than maybe the occasional non-offensive (to all) humor to lighten things up on slow day. If you’ve seen some of the comment sections & forums of many of the trading sites that allow open access to the public you probably know exactly what I’m referring to.

        Feel free to post multiple links to your charts or charts/commentary from other sites, I just wanted you & everyone to be aware as to why they might now show up right away.

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  7. snp July 15, 2016 12:53 am at 12:53 am

    20% is dang remarkable.10-12% is probably real market reversion. the rest? levitation. the yellen “behold” moment…nice photo. will be watching the divergences.

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  8. pangblood July 15, 2016 1:32 pm at 1:32 pm

    @rstoc Thanks for the chart, also could you provide a small commentary on the outlook for oil (whenever you deem appropriate). On the 4hr oil chart, it looks somewhat like a descending wedge/channel with some bullish divergence. However I’m more interested to hear about you opinions. Thank!

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  9. rsotc July 15, 2016 3:04 pm at 3:04 pm

    Will do. I’ll post an update of crude/USO on the front page in a few.

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