The Volatility Index (aka the VIX) is Warning the S&P 500 is About to Drop
In the 40+ years that I’ve been trading the markets I’ve found the Volatility Index to be one of the best leading indicators for forecasting price action. While the VIX is known to be an oscillating index, it follows the technical signals like any stock would. If you’ve been following my reports for any length of time you will know that I have some rules that I’ve developed for trading the VIX, especially when it comes to gaps. My gap fill rules for equities states that 80% of the gaps fill on stocks, and once the gaps fill, there’s another 80% chance the price will reverse from the gap fill point and go the other way. However, gaps on the VIX fill 100% of the time and after they fill you will see the price reverse 80% of the time. Sometimes the price reversals happen right away and other times it might take a while. Don’t take my word on this, go back and pull up a chart on the VIX, going back as far as you like, and you will see this rule to be true.
Below is a daily chart of the Volatility Index highlighting the gaps
With the VIX being inversely related to the S&P 500 you can see how 100% of my price targets have hit on the S&P 500 ETF (SPY), and on the VIX, since November. In my last Weekly Market Report I mentioned that we would most likely revisit the downside price target of 590.63 (on SPY) due to the fact that all technical signals are pointing lower.
See Daily Candle Chart of SPY Below:
Bearish Engulfing Candles result in lower Prices 80% of the time.
Like my gap fill rules for trading equities, the 80% rule also applies to Bearish Engulfing Candles. Looking back at the daily candle chart on SPY you can see a clear, textbook, bearish engulfing candle confirmed by a bigger volume bar on Friday. If the charts could talk, they would be screaming…watch out below.
A bearish candle on the SPY is bullish for the VIX and vice versa.
Many traders look to go long the VIX using instruments like the iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX) and the Proshares Ultra VIX Short-Term Futures ETF (UVXY). I prefer UVXY mainly because I’ve been trading if for as long as I can remember and I’m a creature of habit, but it’s totally up to you regarding which one to trade.
Below is a daily candle chart of UVXY highlighting my most recent price target:
We have already looked at the bearish engulfing candle on the SPY, and now you can clearly see the bullish engulfing candle on UVXY. This makes complete sense because the VIX and VIX related trading instruments are inversely related to the S&P 500 Index.
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Enjoy the ride…This is a great market for swing traders-and ESPECIALLY option traders.
