I continue to believe there is validity and predictive value to the charts of $SPX w/ $VXO and $SPX w/ $VIX. I am also watching these same type of charts with $VXN, $VXD, & $RVX. But here’s the kicker, if you go back to the big move off the 2003 lows to the 2007 highs, then everything changes. Back during that rally, the 5EMA of $VIX went as low at 10 on a couple of occasions. Compare that to this past Friday’s reading of 14.23. However, I believe that everything changed in March of 2009 with Fed intervention and the proliferation of HFT trading systems so I don’t go back any further than 2007-2008 for most things, which may prove to be an error on my part. If this is an error, then that will probably become very obvious by the end of next week’s trading.
Using the $SPX/$VIX chart, I went back and looked at the three previous times since 2009 that the 5EMA dropped to current levels. Those times were:
April 15th, 2010 when the 5EMA dropped to 15.97,
April 29th, 2011 when the 5EMA dropped to 15.06, and
March 26th, 2012 when the 5EMA dropped to 14.88.
I looked at market environment during each of these periods to see if there were important corollary events that also were and/or must be present as further confirmation of this signal and the only thing I found that was consistent was a high RSI on the daily charts.
On April 15th, 2010, $SPX closed at 12.11.67, up 1.o2pts, and RSI closed at 78.60. This was the high for the RSI for this particular move, though not the market. The following day, April 16th, 2010, $SPX dropped 19.54pts, but then rallied back putting in a new closing high on April 23rd before finally rolling over.
On April 29th, 2011, $SPX closed at 1363.61, up 3.13 pts, and the RSI closed at 69.13. This was the high for the RSI for this move and the high for the $SPX, as well.
On March 26th, 2012, $SPX closed at 14.16.51, up 19.40pts, and the RSI closed at 69.42. This was the high for the RSI but not for $SPX. $SPX would roll over for a few days and then rallied putting in a new closing high on April 2nd and then rolled over only stopping this past June.
So what does all this mean? I think it means the markets are approaching a significant top. My timing is clearly off as I thought there would be clear signs of market stress by now. In the above instances, the 5EMA turned north the day following the low readings listed above. This led to tops in the market with varying lag times.
The current situation is that the $VIX and the 5EMA on the $SPX w/$VIX chart closed this past Friday at their lowest levels since the summer of 2007 and the RSI on the daily $SPX chart closed at 68.59. Is this enough? I don’t know so I’ll give the market this coming week to start giving some clues as to what happens next.
GL in the week ahead.