The $VIX has failed to break 12 or rather more importantly, a level of 12 continues to be where selling in the equity markets takes place. I have contended that the inability of the $VIX to break below the 12 level is a sign that the current market rise is not sustainable, and this divergence has been going on for over 6 months now. In essence, the $VIX has failed to confirm the price action. More importantly, it appears that the rocky start by the equity markets this week will see the $VIX close above a prior key pivot point. This always suggests caution as the possibility of a trend change in the equity markets is very real.
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WEEKLY
Figure 1 is a weekly chart of the SP500 with the $VIX in the lower panel. The black dots on the price bars are key pivot points, which are the best areas of support and resistance. Breaks above resistance are suggestive of falling equity prices. Conversely, breaks below support in the $VIX are typically associated with higher equity prices. The key level on the $VIX to watch is at 12.22. A weekly close above this level and equity prices are headed lower. The 14.64 level is also in play, and a weekly close above this level would likely coincide with serious damage in the equity markets.
Figure 1. $VIX/ weekly
DAILY
Figure 2 is a daily chart of the SPY with the $VIX data hidden. The red and gold pivot points are formed when the price of the SPY pivots during extremes in the $VIX. As an example, see the pivot inside the blue box. At this time, the $VIX was extreme relative to the past 40 days (our look back period); during the extremes in the $VIX, buyers surfaced (as expected), and price of the SPY pivoted higher. Thus forming the pivot. This becomes support. Currently price is approaching this pivot or support levels and we should expect to see buying.
Figure 2. $VIX/ daily
In summary, the rally is running out of steam, and there is a real possibility of a trend change. The $VIX should have broken below a level of 12 to confirm a sustainable price move. Instead, the $VIX is looking to close above resistance levels, which in all likelihood would coincide with the end of this rally. Use the support levels on the daily price chart to gauge the price action.
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