The markets continues to trend lower today but they did again manage to finish off of the lows. The VIX, which gave up nearly all of its gains yesterday, did more of the same today, but it managed to close above a key level. The VIX closed above 20 today for just the third time since the first week in March and first time since 4/11. We’ve seen that when the VIX is able to hold gains above 20 for a few days, something it hasn’t done once yet this year, its meant trouble for the market.
Some will point out that the VIX traded above 20 the first 2 weeks of the year, but they’d be ignoring that those closes came in the mist of an overall downtrend. At the time, those closes above 20 on the VIX in January were the lowest daily closes on the VIX in about 5 months. So this move above 20 is different in that it is coming as the VIX is in a short term uptrend from its base in the 14-16 range. The key now is whether the VIX holds these gains.
If we see the VIX staying above 20 over the next few days then we’d be inclined to position for further downside. Even though we still believe the market ought to be due for a short term bounce after this downtrend, we’ll put our faith in the VIX as the most reliable indicator right now. Of course we’re watching oil but that’s already done its job of signaling that downside was coming when it made a key break lower with the S&P500 still around 1,400. Thru today, there’s nothing to suggest that oil will reverse course higher, other than maybe a short term relief rally.
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