Was That The VIX's Super Spike?

October 13, 2014

Back in June, I shared chart analysis of the VIX that suggested this "fear index" was setting up for a "super spike" higher. After last week's volatile sell-off in the equity markets, it seems worth wondering whether the VIX's recent move to 22 was, in fact, the aforementioned super spike.

After all, this level constitutes a 115% move up from its last low in June and a 46% move higher on last week alone. These numbers seem significant.

But when the VIX's near-, medium- and long-term technicals are taken into account, the answer to this question blurs and depends on your definition of a "super spike" as outlined back in June.

For those investors and traders who have been looking for the equity markets to only stretch higher into new all-time highs, the answer is probably, Yes, last week's move up to 22 constitutes a possibly surprising super spike higher in the VIX. This would prove particularly true if the VIX pulls back a bit this week as may be consistent with some other asset class charts.

However, there are other market participants who have held a less sanguine view of the equity indices, myself included, who were not surprised by that move to 22 in the VIX. It was precisely this sort of a move higher that the charts pointed to back in June but as more of a near-term move up rather than a true super spike.

After all, last week's volatile and bearish trading action in the equity markets may have seemed to appear out of nowhere, but the truth is that this current sell-off has been building for months through the tell-tale technical signs of bearish Broadening Formations and Rising Wedges. These patterns speak to uncertain and less enthusiastic buying action but on the masked mania of greed or the fear of "missing out" that shows in the form of increasingly weak and "panicked" new all-time highs. It is the former of these two pattern types that has been reversing the medium-term uptrend all year long.

Now some of those same reversal patterns have started to confirm on a failure of support and this suggests that the near-term selling action is likely to continue and even accelerate despite some possibly contradictory signs in other asset class charts.

This - a significant equity market sell-off in the medium-term - is what the equity index and VIX charts continue to suggest is ahead: a prolonged period of risk-off and one that may come in two stages.

First, it seems very likely that the equity markets will use the current pullback/correction to move into a 25%+ correction in the near/medium-term as the VIX moves toward its 2011 highs of nearly 50. This possibility, in my view, would constitute some sort of a super spike higher in the VIX.

Second, it continues to seem probable to me that the equity markets could trade into something closer to a 60% correction over the medium/long-term after a possible period of consolidation.

Ironically, this sort of a potential correction is sitting in the bearish skeleton of the 5+ year bull market and it would likely happen in violent waves of selling action as has been discussed here for longer than seems possible. It would give new meaning to the idea that things always take longer than seems possible and that stock market sell-offs start slowly and happen suddenly.

Should this type of a bear market come into play, it would likely be accompanied by a move toward 90 in the VIX as outlined in the June piece and that, friends, would truly constitute a super spike higher in the VIX.


Courtesy of http://www.peaktheories.com

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