When we first wrote about the “$VIX Crossover” system, we only analyzed it from the viewpoint of buy signals. In the feature article in this issue, there is an update and review of the “buy” portion of the system. Then there is also an analysis of the reverse part of the system – the “sell” signal. Also, the $VXST Crossover system is reviewed.
We have written about crossover signals from the CBOE’s Volatility Indices in the past. In particular, we want to present research on sell signals generated when $VIX rises above $VXV. But first, we want to update the statistics on the systems that we have presented previously, with regard to these crossovers.
The stock market continues to move higher, albeit at a very slow pace. That makes the $SPX chart bullish, of course, and it will remain bullish as long as $SPX holds above support. The highest support level is the 2090-2100 range that $SPX traded in last week.
$SPX has finally broken out to new all-time highs and has maintained that status by closing above the old highs for four consecutive days. That's the bullish news. The less-than-bullish news is that the breakout is not being confirmed with any resound by some of the other indicators. However, as long as $SPX remains above the 2065 support level, the bulls are in charge.
The Standard & Poors 500 Index ($SPX) has finally broken out of the 1990-2065 trading range that had contained it for nearly two months. The breakout was not easily achieved, nor is it uniformly confirmed by all of the other indicators, but it is in place.
As for support, there should be ample support at 2065 and at several levels below that, all the way to the bottom of the trading range, at 1990.
Now that January is past, most of the seasonal trades are over for this cycle. It was an interesting and somewhat profitable seasonal trading season, but it always behooves a trader or analyst to go over the results of a system while the data is still fresh. This can lead to adjustments – hopefully profitable ones – when the seasonal system rolls around the next time. Furthermore, if no adjustments are needed, it confirms that the system is continuing to work well.
Last October, the CBOE changed the way it calculated $VIX – or, as the CBOE put it, the methodology was “enhanced.” The change was a logical and necessary one, in that weekly options were used in the calculation, where applicable. $VIX is a 30-day volatility estimate, and it had always used the two nearest series of $SPX monthly options. They were then weighted to produce a 30-day volatility measure.
The stock market has had a strong week. Even so, $SPX remains within the general confines of the 1990-2065 trading range, on a closing basis. We still await a breakout from that range in order to establish an intermediate-term trend.
In something of a surprise, both equity-only put-call ratios rolled over to buy signals after Tuesday's trading this week. The computer programs that we use to monitor these charts were right on top of this new signal.
Market volatility has remained high, and we can expect these high levels of volatility to persist.
Even with this volatility, the chart of $SPX is still in a trading range. Once again -- for the fifth time this month -- 1990 has proven to be support. To say that 1990 is an important level would be an understatement. If it gives way, a much more bearish situation would develop. On the upside, there is resistance at 2065.
...An astute subscribers noticed that, last week, another $VIX “spike peak” buy signal was setting up. $VIX had risen more than 3.00 points, measured with closing prices, from Jan 9th to Jan 13th (two trading days later). Moreover, $VIX then dropped sharply this past Monday, January 20th, triggering a second signal while the first one was still “open.”