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Thursday 3 February 2011

Vix Buy Signal

Yesterday was a mind-numbingly tedious day and essentially nothing happened, so I'll post three to-the-point short term charts and move on to more interesting things. The first chart is the NQ 60min chart, where a broadening descending wedge has formed in the last couple of weeks. Within that wedge we appear to be forming a bull flag but may instead be making a short term top. Declining resistance is firmly established at 2325.5 and (bull flag) support is at 2312.5. A break with confidence in either direction will look significant and while I've been writing NQ has broken the support level on the range, so today looks likely to start out bearish:
The second though slightly longer term chart is the IWM chart, where broken support has been tested twice now without breaking. There is some significant resistance here:
I posted the Transports index daily chart the other day to show the growing divergence between the Transports index and the Dow, which is of course a growing Dow Theory non-confirmation. That divergence has been widening this week so far:
As I mentioned yesterday, the next upside target on the ES daily rising wedge is now in the 1315 ES area, and I'm expecting that to be hit in the next few days, so I'm leaning bullish overall for the rest of the week. Interestingly we had a confirmed Vix buy signal (for equities) yesterday so I thought I'd have a careful look at the Vix today. I've charted up the closes above the daily bollinger bands on Vix in the last fourteen months, and examined the performance of the confirmed and failed Vix buy signals over that period. The performance of the confirmed signals wasn't bad at all, with all five previous confirmed signals being before or during significant bounces on equities. Of the three failed signals two preceded large drops and the last failed to signal the huge bull move after the August lows. The signals seem to indicate that a 50 point + move in SPX is imminent or in progress, though with ES currently up 36 points from the weekend lows it might be that the signalled move is already mostly complete.

Other interesting things to note about the signals over the last four years were firstly that there were no instances in the last few years where a confirmed signal was given just before a major top, and that significant highs or lows have often been signalled with with two breaks above the Vix daily bollinger bands within a three week period of which at least one was a close above it. These signals were given in Oct '08, Jan '09, March '09, Jan/Feb '10, Aug '10 and Nov '10. These signals seem to signal highs in a cyclical bear market and lows in a bull market and with the exception of the July '09 low, they caught most of the significant bull moves since this cyclical bull market started in March 2009:
While I was looking at the Vix I also looked at the monthly chart since 1990, which was likewise very interesting. There is a support floor on Vix in the 15 area which has only been broken twice in the last twenty years. Firstly in the 1992-6 period and then in the 2003-7 period. Vix traded well above it for the whole of the technology bubble period in 1997-2000 and in the 2002-7 bull market it was broken just over a year into the bull market, so at a much earlier stage than we have reached in this one. It may well therefore be that this Vix support floor will hold for the entirety of the current cyclical bull market, though if it is broken, it will open up the lower support range of 9.5 to 11:
I was going to post some charts on bonds this morning, but there are too many and the topic is too involved so I'm going to write a separate post on that and post it tonight, but I'd just like to say that I've been working on the assumption that bonds are consolidating for a bounce here, but after a much closer look the picture looks bearish rather than bullish. On the 60min chart there is a bearish descending triangle, which gives a nice range to play while it lasts, but resolves downwards 64% of the time, which would deliver a very significant support break if it happens. Short term there's every reason to expect a bounce within the pattern though:
Very short term support on NQ has broken while I've been writing, and if we see further declines then we may well see a test of key support levels on NQ and ES. Those levels are 2300 on NQ and rising support at 2289. On ES I'm seeing strong support at 1284:

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