Looks like we might rally for a bit

Vix is a pretty reliable indicator of whether equities are in an uptrend or a downtrend. In particular, when Vix is below its 20 dma, the markets usually are rallying. Today, Vix once more broke below its 20 dma, and by the looks of it, Vix is heading lower (top panel).

The equity-only put/call ratio (CPCE) confirms this viewpoint. The 9 EMA of the put/call ratio after rising last week, appears to be heading lower, which is bullish for equities (blue line, second panel).

I've picked up another technique for utilizing the CPCE to mark intermediate tops and bottoms from Cobra's Market View. It involves drawing descending trendlines from highs in the CPCE (which correspond with lows in equities). After these highs in CPCE, the markets tend to rally, leading to successive lower highs in CPCE and hence the descending trendline. When CPCE finally breaks above this trendline, that marks an intermediate-top. The technique appears in the second panel, with the raw CPCE as the grey line. Also, the technique only works with closing CPCE numbers; intraday spikes don't count. For a better explanation of the technique, see Cobra's post.

Both Vix and CPCE are presently suggesting that equities are rallying. This picture could change with one hard day of selling, but till then, I'm long.

I would like to see the Yen weaken, but Treasuries have been selling off, and that is also supportive of equities.

Is the bottom in?

Vix is signalling that we are very close to the bottom. Vix after spiking way above its 20 day BB pulled back across its 10 dma. That's bearish for Vix and bullish for equities.

As well, the Yen spiked up to its highs from January and then sold off, putting in a shooting star candle, and that's bearish for Yen and bullish for equities.

Treasuries continued to sell today, although possibly a bullish candle, but IEF's BB's are pointing down, which is bearish for IEF and bullish for equites.

So it look the bottom is in -- almost. To confirm it, we need Vix to break its 20 dma (singalling that there's an uptrend in equities) and we need the put/call ratio to roll over decisively.

For all that to happen, we need one more up day in equities -- maybe AAPL will seal the deal and confirm the bottom

Vix - put/call ratios - Yen - IEF

After Vix's move well above its 20 dma, it has pulled back, as expected. Now the question is whether this pullback is the start of down trend. The next barrier for Vix is its 10 dma, and after that the 20 dma.

The put/call ratios have yet to turn over -- actually the equity-only ratio looks like it topped last Thursday, but I'd like to see a more decisive move down before saying that it's called a top.

The Yen are moving sideways, neither bullish nor bearish, while Treasuries have been selling off, which is bullish.

It's promising that the bottom is in.

Vix - put/call ratios - Yen - IEF

In the past, when Vix spiked outside of its 20 day BB, it marked bottoms. This rule broke down last October during the forced liquidation, but even then, it was pretty accurate at marking short term bottoms.

Yen and TLT/IEF helps confirm these bottoms, although these two instruments are not as tightly correlated, often turning before or after the bottom.

The put/call ratios can also help track these bottoms, with the 9 EMA of each rolling over at important turns.

Vix spiked across its 20 day BB last Thursday, and pulled back on Friday. Both Yen and IEF rolled over at the end of last week, which gave a good bottom signal. The put/call ratios started to roll over, but have not followed through today, and we are still in search of our bottom.

But Vix is above its 20 day BB. Bottoms happen at these levels. Unless we enter another period of forced liquidation like last October, the bottom is near.

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.