VIX Divergences Building
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We’ve previously mentioned the predictive tendency of several negatively correlated days in close proximity for VIX and VVIX, and we have just completed a series of 3 days where the VIX and VVIX had inverse closes (one closed higher than the prior day while one closed lower). Such negative correlations can go on for longer, but we have good odds of seeing a VIX spike as we see the number of such days stacking up.
It’s also worth noting that the VIX made its recent low on Friday, June 27, so it’s been a sneaky one this week, not rallying (except for some intraday pushes higher that faded), but holding above Friday’s low.
We also have the Hull Moving Average, which has now crossed under the VIX, triggering a long volatility signal according to my metholodogy. Though bullish seasonality for stocks has been the overarching theme this week, we are looking ahead toward next week and beyond so we can be prepared for anything in terms of our portfolio positioning.
VIX monthly option expiration will be the Wednesday of OpEx once again this month (sometimes it’s the week after), yet we already see a very large negative focus by participants as we look at GEX structure. The GEX Intensity Gauge shows that we aren’t too far away from an extreme negative reading compared to prior GEX readings over the past 52 weeks. With the largest negative cluster at 17, the odds currently favor that we will either stay fairly close to 17 or possibly above 17, and 2 weeks is a long time for the VIX to stay at such a negative position. I view the risk for volatility to be to the upside, even if temporary between now and July 16.
IWM was last on our list to not have tagged its upper Keltner channel and upper Dealer Cluster zone at 220, that is, until yesterday. We saw another attempt higher today, making a higher high, and we see GEX at 225 and 230 worth noting. The Keltners look bullish and they’re pointing higher in almost parabolic fashion. IWM seems to be a good index to view through contrarian lenses, including early in this rally, when the GEX picture was stubbornly negative. Remember that as we see participants throw in the towel on bearish positioning.
Indices across the board have moved more bullish in terms of GEX, but a closer look at the largest individual GEX clusters place more of an emphasis on August and September, not the present, as far as hitting those higher targets. The rising Hull is also at such a steep angle that it will likely pass over IWM’s price soon, the opposite condition that we see with VIX. IWM could easily spike to 222-225, but I wouldn’t expect such a move to last until we fill some gaps below, so it might be short-lived.
SPX also maintains a bullish picture, though its progress this week has been more muted relative to IWM, moving sideways until a push higher today. The Hull is almost at the upper Keltner channel, and SPX is above the upper Keltner, though the rising channel could presumably allow SPX to ride the line as GEX grows at higher strikes. The Hull may be the biggest technical problem on my chart, since the inevitable crossover combined with the VIX crossing over its Hull (to the upside) create an environment more conducive to a market pullback. The bullish picture is undeniable, but the timeframe required for 6400-6500+ may disappoint those looking for a painless trajectory higher.
SPX GEX did increase today, though net GEX remains considerably below Friday’s 2B high reading. I’ll be following tomorrow’s half day close with interest as we see whether or not SPX continues lower in terms of GEX or if we move higher yet again. We consider readings over 1B to be bullish in general. With a lot of small caps and speculative stocks moving higher this week, we may be setting the stage for a buy-the-dip opportunity this month, and we’ll be ready for the summer shopping sale when/if it happens.
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