The signal is a simple 5 point INCREASE in the value of VIX , on a closing basis.
The low VIX reading is 12.14, so look for a closing value of 17+ to trigger an entry for this BUY SIGNAL.
I have posted several times in the past about market signals generated by shifts in the value of the VIX index. In the last year, the general conclusion is for average rally in SPY of 5-8 points in the 10 days following the signal, but along the way there was an average decline of 1-4 points. This last year the signals have been exceptionally profitable.
What we are seeing here is a market decline without fear building up. This is a sign of complacency and is longer term . Any bounce from here should be a low-risk shorting opportunity until we see a VIX approaching the 17 level. We could be seeing a market signal here that is extra-ordinary and let's watch closely.
How does VIX work and why is this important? I can best explain this by saying that VIX rises when people are BUYING options. Often, people buy options when they are protecting their portfolio from loss as that is viewed as "conservative" by the financial industry. Buying calls when you are is considered "speculating" and is frowned upon. So, if the market begins to move dramatically down, then people fear they will lose more money and buy puts to protect their portfolio. The mere act of buying puts drives up the price of the component of the option and it forces the person who sells you the put to sell short or sell their longs to generate cash to hedge the option. Hence, buying puts forces selling into the market. Therefore, a spike in VIX is really often-times a spike in selling.
We are not seeing a spike in selling here. ALSO, the last decline we saw in December did not give a signal, which is another sign that people are not scared enough up here to hedge their portfolio. This is a sign that when selling does begin, for whatever reason, it could be much larger than normal.