Vix is starting to look toppy

Vix today spiked up to its upper 20 day BB and then reversed. Vix often reverses from these levels, although a change in trend usually requires a spike across the 20 day BB.

Vix is also above its 10 day BB. Reversals happen from these levels as well, but the BB can also act as support.

Both treasuries and the Yen were up today, but not decisively so. The trend in all indicators is up, but Vix is looking toppy.

Today's Vix candle might be hinting at a reversal, but its wick is shorter than its body. The alternate interpretation is to view Vix as an equities overbought/oversold indicator, with the pullback in Vix today relieving some of the overselling.

While the overall trend in these indicators is still up (and the trend in equities is still down), Vix, TLT and the Yen are hinting that a retracement may be in the cards.

Vix, Yen and TLT

Vix today jumped 7% closing well above its 10 day upper BB and above its 20 dma. This trend is disturbing for equities with Vix above its 20 dma has been associated with a down trend in stocks.

The move up in Vix coincided with further strength in Yen as well as in Treasuries. The Japanese Yen has strengthened 5% since early last week, a giant move in the world of currencies. By the looks of it, FXY is going to test its upper BB very soon.

TLT, after hovering around 112 all week, seem sto have broken north. IEF (Barclay's 7-10 year Treasury fund) moved up strongly today as well.

I suppose these results are not surprising, given the weakness in equities. What is more of a concern is that each of these signals have more upside before reaching resistance, suggesting that there will be further weakness in equities.


But it is interesting that VIX/VIX did not rise today, although I am not sure what to make of it. In November VIX/VXV was flat over the middle portion of the month, wihle equities were down.

Vix, Yen and TLT -- Vix is still finding resistance

Payroll numbers came in as expected, but the unemployment rate jumped. This, along with the poor economic releases out of Europe, set a negative tone, and the markets fell right after the opening bell.

Potentially, if SPX cracks 890, we could have the start of another downleg. Early this morning, it looked like SPX would break. The Japanese Yen was up sharply at the open -- this often signals equity weakness. Within hours, TLT followed the Yen up, another indicator that stocks would weaken. But Vix has risen only slightly, and once again is finding resistance at it upper 10 day BB.

There are still a few hours left before the markets close, but the longer Vix fails to break above is 10 day BB, the greater the chance that equites will bounce.

Vix, Yen and TLT -- vix running into resistance

Vix ran into resistance at its upper 10 day BB today, while the Yen strengthened sharply. TLT was more or less flat for the day, not following the Yen higher.

Vix was setting up a nice reversal pattern to the upside with yesterday gap up and big white candle -- today's candle is more uncertain, not quite a bearlish shooting star, but not quite a bullish white-black harami. Same story with SPX.

The Yen direction is also up in the air -- in isolation the past few days look very bullish, but taken in context with the move down from the highs, this latest moves, retraces 50% of the drop, and stopped at resistance.



Let's see how the markets react to the payroll numbers tomorrow -- for the past year, tyhe market has sold off the day payroll anticipating weak numbers. But this year there was no sell-off (although perhaps Wedensday's down counts?)

From Wall Street Journal's Marketbeat Blog
The Pre-Jobs Selloff

Month Covered	Dow Change	Jobs Change
June	-166.77	-100,000
July	-205.66	-67,000
August	-344.65	-127,000
September	-348.22	-403,000
October	-442.48	-320,000
November	-205.45	-533,000

Vix, Yen and TLT -- becoming bearish

Vix, Yen and TLT are three of my favourite indicators for stocks, with all three having negative correlations with equities.

Vix, in particular, has some powerful predictive properties for equities. I find that the 10 day and 20 day Bollinger Bands (BB) help frame these properties.

Consider the 20 day BB and how vix oscillates between the bands. When Vix is in the lower half of the band, the trend in equities is up, and vice versa for the upper band. When Vix spikes outside the 20 day BB, that usually means an intermediate term top or bottom in the markets (last October the tops were very short term). These events are consistently followed by tests of the center of the BB, and usually lead to tests of the opposive BB.

However, many times Vix's behaviour is constrained by the 10 day BB, instead of the 20 day. So it helps to watch both.

Below is a chart of Vix, with both 10 day and 20 day BB. I also have the ratio of VIX/VXV in the same chart (VXV is the 3 month Vix). The second panel has $XJY (Japanese Yen) and GLD, while the third panel has TLT (20+ year Treasuries) and $SPX.

Vix jumped today, with both XJY and TLT finding support from their sell off last week and both starting to move up. These all correlated with the sell-off in equities. But if these trends continue, expect further weakness in stocks.

As noted on the chart, Vix did find resistance at its upper 10 day BB. Above this is the center of the 20 day BB. But if Vix makes it above these two, it probably means an extended downtrend in equities is in order.

And finally, we have the ratio of Vix/VXV. This ratio was trading at a discount since Christmas, it has since gone flat. This is normally bearish for equities as it implies investors are becoming more bullish on Vix.

However, the longer-dated Vix futures are still trading at a premium to the index, so perhaps the Vix/VIX ratio is not as bearish of an indicator.