Watching the VIX is extremely important right now and might give us clues as to where the stock market is heading next. After the bearish Sept close I studied the VIX the weekend of Oct 2nd to figure out if the stock market was going to "crash" in October since we ended the month with a bearish engulfing candle on SPX . The VIX also created a monthly bearish engulfing candle in September. I went back 20 years and found all the monthly bearish engulfing candle closes and studied the times were a crash DID occur. My analysis concluded that a "crash" wasn't going to happen early October because the VIX closed Oct 1st below the Tenkan Sen line ( Ichimoku terminology) and in the months where there was a major or minor crash the following month the VIX stayed above the Tenkan Sen line on the daily. As of Oct 2nd, there was now only two other VIX scenarios that could still play out in October where a minor or major crash could be on the horizon. Those were the ones that came in June-Aug 2007 and Oct-Dec 2018. The June-Aug 2007 was a little different in that it didn't have any gaps to fill in July from June & in July the Vix never dipped below the 50% retracement of June monthly open/close price. So that leaves Oct-Dec 2018 as a possible duplicate scenario. The above chart shows the current DAILY VIX on top vs. the DAILY VIX from Oct-Dec 2018 on the bottom. As you can see the set-ups are very similar.
Overall, SPX remains bullish but is certainly reacting differently to this dip than any other post-Covid dip which is why it is very important to watch for clues from the VIX . As of today, the VIX implies we are not yet bullish nor are we bearish ...we are ranging between 17.74 & 24.75. My thoughts are that we need to break down below the rising wedge line that is forming on the daily (purple line) and CLOSE below 17.65 (orange line) to remain bullish . If we cannot break below the orange line on the daily then who knows where we go but a measured move on the VIX could happen..this would put the VIX around 40 . Why I choose 17.65 is because it is the higher low that was formed on the bullish Vix swing from Sept 1st-20th.
On the flip side, there are certainly more that 7 set-ups (I don't know how many but many more than 7) where there was a monthly bearish engulfing candle whereby the following month the Vix remained bearish and the SPX continued on it's bullish run so that is certainly still a stronger possibility and one I see happening if it can bullishly close below 17.65.
Would love to hear your thoughts/comments as I'm still really new at all this analysis!
Trade closed: target reached
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Today the VIX had a big red candle right through 17.65 so this eliminates the 2018 set up. Certainly anything is possible and I suspect we will see more whipsaw action going into the Fed meeting on Nov 2 & 3rd but I'm leaning toward no crash or mini crash in October. There are still two overhead gaps that will get filled at some point. One at 20.99 and the other at 18.44. These areas might provide good entry set-ups.
This is epic stuff for your first publication! God Bless!
Vixtine
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@ChartProphet, Thanks...still early in the learning phase. I've spent a good 9 months just watching the market and reading a ton to learn about TA, etc. Right now the VIX (IMO) needs close the weekly under 15.19 and then needs to consolidate between 14-15 in order for it to stay "muted" between 12-20. If it cannot solidly close below 15 then I think 30-50 is possible in the coming month or two
simplenothing
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Very interesting analysis. I'm a big believer in using vix to guage market sentiment. Besides using VIX, you can compare SVXY to SPY. But it helps to multiply SPY by 1.25 to be more comparable. Today, for example, that ratio closed negative compared to a gain on SPY. So, basically a divergence like this is bearish. The prior day's ratio had no support for SPY closing higher either, so the divergence is accumulating. If, the theory holds, today's close might be the highs for awhile... We'll see.
hyipster
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Thanks ! But can VIX rise without any dramatic event on the markets ?
Vixtine
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@hyipster, The VIX rises dramatically when all the indices go down together. Not sure what the event will be to make that happen or if it will happen but the VIX is not giving us any indications at this time...it's just ranging so until we break either above or below the range we don't know which way it will go. A bullish break either way will tell us which way we are headed but until then it's hard to trade as you are just gambling with the direction. As of today, neither the overhead gap nor the lower gap have been filled.