Figure 1 is a weekly chart of the SP500 with the $VIX data hidden. The indicator in the lower panel assesses the current value of the $VIX relative to pass swing points in that data. There are two points worth making.

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WEEKLY

Since April, 2013 the indicator has been diverging negatively from the price action. (I have been making this point since September, 2013; see this video.) The failure of the $VIX to break below a value of 12 and the failure of the indicator to confirm the highs in price are noteworthy. These distortions are now being corrected. The indicator is rolling over, and a bottom in prices won’t be achieved until the indicator hits bottom as well. This is several weeks away. Thus the trend in prices is down.

(For the record this is what I said on January 14: “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.”)

Figure 1. $VIX/ weekly

DAILY

But there is hope!!

Figure 2 is a daily chart of the SPY with the $VIX data in the lower panel. The $VIX is sitting at a level where 4 out of the 6 short term/ intermediate term bottoms took hold in 2013. Will 2014 be the same? This is the test for the $VIX and the markets. Look for the markets to put up a fight, but from this perspective, the tide has already turned.

Figure 2. $VIX/ daily