This pattern was shown to me by Liz Ann Sonders in her publications at Charles Schwab, which are available to all of us via Schwab.com and her posts on Twitter.
What you see here is when longer term (3-month) VIX (VIX3M) drops to a fraction of front-month (1-month) VIX, it can signal an extreme shift in demand for short term options, which has shown us time and time again to be a stock market bottom.
If the market doesn't recover from one of these spike-downs in VIX3M/VIX, then it implies that was just one selling wave of many. To explain: a selling wave happens as investors first bought puts to hedge their own selling (driving up VIX as they purchased puts), then sold stock and purchased call options to replace the stock positions. Secondly, the overwhelming weight of the sales turned into "hot potato" selling where each successive buyer tries to pick the bottom, but turns around and sells out at a loss. Buyers can't stop the momentum of the powerful selling wave hitting the market until it finally does when sellers wear out.
Click on the "MAKE IT MINE" button and scroll your mouse through the data to see how and when the data points line up. Get comfortable with it and add it to your arsenal to help you find market tops and bottoms.
Take a look at my other VIX charts publications to learn even more about VIX that you didn't already know. Hint: I have a very clever way of looking at VIX that will give you insight into what is going on and how to interpret it and use for future trades. I'm always in the Key Hidden Levels Chat Room here at TradingView.
So, I'll make this a "LONG" post for the SPY, but this only applies as a general filter, not a specific on since when VIX "goes wild" my time frame shifts down to about 3 hours from my normal time frame of 3-days to 3-weeks.
@nakov, You are welcome! The most powerful signals are PAST VIX SPIKES which represent previous accumulation levels. Check out those links above when you get a chance.
nakov
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@timwest, thanks, I will :) I remember you said in March you see 2018 range-bound on the stock market and it definitely seems your prediction comes true.
What is your preliminary outlook on 2019 as of now? I.e. do you see some potential for more gains in stocks, e.g. breaking 3000 on S&P500, or the push higher is likely exhausted and the bear market is lurking?
@nakov, I've done my prediction for the year in January to as late as the first week in February each year. I'll try to stick to that format since that is how I have done it all along. I do find that December is when the market has done something a little different from what I have expected over the past 5 years, but I'm just guessing using my best logical deductions.