VIX and XIV

Regular readers know I pay a lot of attention to VIX and XIV. They frequently have the right read on the market and so I have learned to ignore them at my peril. I find technical indicators on these two vehicles to be a great confirmation of stock index positioning.

VIX has been low (ie closing under long & medium term pivots) since 11/8. VIX even dipped into the 10s which is quite rare. This helped confirm "long and strong" after the election regardless of one's political views or fundamental prognostications. 

But even this doesn't capture what has been going on in XIV, an inverse ETF related to short term VIX futures. This is a good article on how it all works, but for now I just want to put up a few charts.

Bottom line - All timeframes on XIV are quite stretched. XIV has already reached 1HR1 and may tag YR1 soon. While this has been an incredible run, I'll be watching for any reaction from these levels: 1HR1 56.82 and especially YR1 59.86. If XIV stops going up, stocks are likely sideways at best and more likely down. 

XIV M
The only bar that compares to the current bar was 6/2014, which was quickly followed by a -48% drop. 

XIV W
This timeframe is also fully overbought, and has closed outside the Bollinger band for 7 of the last 9 weeks. This is an incredible run, but at the point where it should slow down at least and more likely drop. 

XIV W - long term pivots
Already above 1HR1, the first asset class I know of to reach long term resistance already. YR1 within reach. 

The VIX trade

So idea on this was buying a yearly level on VIX at a place where stocks were very likely to pullback as a way to hedge the longs. 

This was suggested in the weekly strategy here : "If stocks consolidate I like the idea of trying TLT if above its 1HR1 level 127.87 and next weekly pivot; possibly looking to buy VIX futs J6 either with a move from Q1S1 17.72 as support or if one more plunge then down to YS1 (!) 16.85 would be a good stab at speculative long." 

And repeated here on 3/22/2016 daily SPY commentary: "Still, the VIJ6 idea could work as long as it lifts up from 16.85. This is a situation similar to the ES short idea at 1988, although this situation officially "speculative" as we are buying support (ie, speculative buy = something below all pivots). Depending on your agility you can simply wait for a clear reversal and enter there, or watch the hourly chart and buy with any lift from the same level, or could have entered speculatively at the close today in smaller size with trade valid above 16.85 from here. Of course the more time passes the more volume will shift into the K contract with different levels."

16.85 to currently 18.30 is up over 8% with DIA down -1.3% from price high to current level, and SOXX down about -2.8%. Of course you would not be putting in a huge amount of capital on a short term high volatility hedge, but 1 unit VIX would have helped quite a lot of the stock long position drop this week.

Of course the same idea could have been played through VIX ETF like UVXY. Obviously VIX related vehicles are strictly short term with a lot of deterioration either in futures or the ETF. The same idea could have worked through put options but that is just too much for me to go into here.

UVXY is up 15% from Tuesday's close (when VIJ6 reached 13.85) to current level. From Wednesday open to today's high was as 16% move. But this could vanish as quickly as it came so if taking as a hedge I'd be locking in some depending on how SPY and other indexes move on their weekly S1s. In fact SPY holding WS1 as RSI on the 1H chart reaches oversold sets the stage for a bounce which would quickly give back some of the hedge gains.   

Point: in the future if a short term hedge on longs looks like a good idea I'll mention VIX futs or or index puts because they are all doing the same thing - allowing one to hold winning long positions while there is a high probability of a near term drop. 

 

VIX

I really like the action on pivots with VIX and related vehicles. One glance at the first chart below and you'll see why. 

VIX W with long term levels only; and yes, weekly closes on the YP this year, last year's low very near 2HS1 and high bang on YR3. 

Here's the daily chart with medium term levels added. You can see VIX below the Q1P and thus below all pivots! It did come near the MarS1 but did not tag. Really VIX did not confirm any short setup yesterday, although did confirm a buy on 2/12 with a poke above the YP and clear rejection the next day. 

There are others: VXN, VXD, RVX. Here skipping to an inverse ETF which can help confirm a trade setup with stock indexes too. This was quite right on the August breakdown, also correct in staying under its YP in Q4, showing weakness of the market; below all pivots to start 2016, low very near YS1 then up from there. 

Lastly the VI futures which have high rollover. High of year bang on YR2, and recent drop under all pivots actually quite bullish for the market. Again not confirming a short setup yesterday, as it would need to lift above pivots. 

Two speculative maybe shorts

Last week I very gently hinted at an ES short near 1988 but it was more in a post called Thoughts on signals because 1) we didn't have a clear reversal yet and 2) not confirmed by VIX vehicles, which usually gives the best signals. 

Now, just because we have levels doesn't mean there is a trade or position adjustment. Taking entries anytime we are a level will drive you crazy. The important part is seeing the reaction from them and acting accordingly. This will mean you will have fewer incidences of buying *the low* or selling *the high* but a lot fewer trades with a much higher win ratio. Like I said the other post, if you are very active and want to pick turns better to do so watching very short term charts (15m, 1 hr, etc) on SPY and ES charts and incorporate daily and weekly pivots along with the other levels. 

So, this is why I wasn't just saying buy S1s anytime they tagged on USA indexes because you would have had a lot of stabs before finally getting a winner. The key difference was the confluence of several indexes making the same move and a very clear reversal 2/11-12. 

So if we apply the same idea on the short side, we should only short after a clear reversal. We may miss the move by some points, but again, far fewer entries. 

Anyway, keep an eye on ES today because under 1988 means Q1P rejection, FebR1 rejection, back under YP and 1HP. But anything above 1988 means long term support holding at that is bullish. 

Meanwhile, VIX made it down to 16 on Friday. This is fairly low although a far distance from 2015 lows of 10.88 and 12.80.  Measured by daily RSI it is quite low. Anyway, VIH6 may jump back above its FebS1 at at 19.01. So if you wanted to be long VIX that is the level to trade against and see what happens at the Q1P at 19.82, or if market continues its march up then we can watch next support 17.20.

12:45 EST update. So far indexes SPY & DIA holding above levels which is bullish. It would not take much for SPY to drop back below, but have to say DIA looks good here trying to lift above its YP; still under its Q1P though. 

Basic bull vs bear ideas

So as I pointed out in this post, USA leaders SPX / SPY / ES and INDU / DIA / YM have rallied back to their YP / 1HP pivot areas. Due to variances in pivot structure, there are slight differences in the levels. So far ES has come within 1 point of its YP / 1HP combo, while SPY is a full 1.00 below and SPX about 30 points. So this is the lower end of a key area for this asset class.

Likewise, both DIA and YM have tagged 1HPs, but the INDU cash was still about 80 points away. If higher then INDU will be the first cash index to reclaim its YP. 

The big cash levels are not to be ignored, and the key turns on 1/20 and 2/11-12 have had many of these in play. But the futures also are a tell especially if the pros see an extended market (like the FebS1 near exact on the 2/11 low), so let's watch ES 1988-89. 

Basic bull: ES clears 1988-89 as DIA gets above its 1HP then starts to test its YP area without much selling, or simply clears as we move to the cash index levels that are a bit higher. 

Basic bear: rejection starts anytime and down to MarPs to test those. 

Other: We could have an unclear move, like a small down bar that looks like a pause, or a weak lift through one or two levels but not convincing; and there sometimes there can be chop. Chop is the worst. 

So, if clearly bullish then we'd want to hold all the stock buys and asses as the higher end of resistance tests, and possibly reduce more on safe havens. If clearly bullish then opposite. 

It is likely that bull scenario would correspond with further drop in TLT, although not sure about GLD since that is holding up well. Basic bear would mean TLT up and likely GLD up too. 

Lastly, some of the sure thing setups come with an combo of index vehicle plus VIX. Then to be fancy on VIX we can also use and ETF and/or futures to see if they all agree. For now here's a simple VIX chart with all pivots. You can see QP held as support early January, and the YP was trying to hold as resistance in January. There was really one day with a close above the YP on 2/11, then recovery with a good reversal down and stocks have been rallying since. That is part of the reason why I recommended the DIA buy on 2/12. For now, back above the QP would be correspond with stock selling, or perhaps we will see VIX drop to its MarS1 and see a turn there. 

Weekly strategy update

Judgment based on the close, but for now:

ES needs to hold 1925 its FebP. Anything below that would be first warning sign of trouble.

Also, yesterday I mentioned that it would be better for VIX to confirm strength by dropping under its QP of 19.27. So far that hasn't happened. 

The point on both of these is that a bearish move back under SPY / ES FebPs, along with INDU / VTI would mean cut recent longs and add shorts. List of short possibilities means anything that stayed completely under its FebP without even tagging: QQQ IWM IBB XLF and possibly NKY / EWJ or DAX / EWG.

GLD - I may have erred on the partial take yesterday. To be clear, I pointed out gold in late January and that main portion I think is worth holding, but any adds after the YP clear on 2/3-4 were the judgment call. Above its WP 116.97 would be short term bullish; then if GLD clears its YR1 again then I think worth having a full position. To watch. I haven't talked much about GDX, mostly but not exactly correlated, then I mentioned yesterday that it was doing fine. 

RSX, EWZ, EEM. These are fading a bit today along with the market, oil and $USD strength. EWZ in particular tagged FebR1 and now back under. As I type ACWI is dropping back under its FebP, so a close under that level would help point to taking some gains off the table on these quick squeeze ideas. EEM more tied to China and it hasn't done too much. 

BTCUSD is pulling back from its FebR1. It would be better above, but if markets start to slide again, or trouble in China, then maybe BTCUSD will explode higher. Buy on 2/16 near 407 just cannot become a huge loss so i think worth giving it room.


Is a major low in?

I don't know. As explained here, It isn't my bias but so far multiple long term support levels have tested and held for several USA main indexes, or broken and recovered. Conversely, safe havens TLT and GLD reached long term resistance and have faded back down. So I have to consider the possibility of a major turn. 

Basically, is 2016 another first quarter major stock index low like 2014 (SPX lows 2/3 & 2/5) then up for most of the year - or  2015 (SPX lows 1/14, 1/15, 1/30, 2/2 then up for several months? Or is this just a bounce in larger downtrend for stocks, and pause in bigger rally for the safe havens? 

Here are some levels to watch:

1. SPX cash YS1 at 1896. NDX came back to recover its YS1  4007 last last week, and INDU held 15746 after a 1 day break last week, and RTY low bang on YS2 952 that held. So SPX needs to join in. Keep in mind SPY and ES futs already above their YS1 levels at 186.25 and 1866 respectively, but I think SPX cash will confirm the rest or prevent from going higher. Then we can also add NYA YS1 9350 to our watchlist; if this doesn't clear then breadth has not really improved. 

2. Oil. A lot correlated on oil these days, and CLH6 WP testing as I type at 28.95. Above that means more bounce possible, below means another test of the YS1 at 27.89 on H contract. 

3. Various other short term levels and RSIs on hourly charts. For example, SPY WR1 at 189.61 and the SPY WP at 185.35. Above WPs keep bounce hope alive; weak tags of WR1s and sharp drops would be the first sign of trouble, and or a fade back to WPs and breakdown from there. 

4. VIX. Despite the ugliness of the year, VIX has managed to stay below its YP / 1HP pivots both at 27.46 on a daily closing basis for all but 1 day. If VIX rises above 27.46 then this will probably confirm a breakdown in indexes. Conversely, VIX below the FebP at 23.84 would help point to or confirm a stock rally. 

 

INDU and turn here?

The Dow Industrials index, or INDU, though common in the media, doesn't get as much attention from the pros. For example, daily volume on SPY yesterday 190M, QQQ 60M, IWM 53M, and DIA a lowly 10M. Futures are similar. However, from The Pivotal Perspective we need to consider the Dow as important as other indexes. Evidence all on INDU long term pivots over the last 10 years:

2006 key high in May on YR2
2007 low of year in March bang on YP, and *the top* on 2HR1
2008 major lower highs April and May bang on YP; July low on YS2
2009 *the low* on YS1 near exact
2010 key high April 1HR1, key lows May June very near 1HP
2011 major high in May on YR2
2012 highs March - May on YR1
2013 QE steroids year trend up no turns; YR2 support pullback low in June
2014 low of year on YP exact
2015 key low early February on YP exact, lows of year just under YS1 (INDU traded below YS1 for 3 days in 2015, and actually level held on each weekly close)

And since we here we are near INDU YS1 again, have to consider it as possible major support. Here's the chart. Recovery and close above YS1 15746 possibly bullish, even better to close above 1HS1 15817. Remaining below those levels definitely bearish. 

Other yearly levels in play are on the RTY cash index. Similarly, possibly bullish above YS2 952, then better above 1HS2 966; definitely bearish if remains below. So, if short on IWM from late December on best trigger or early January, or reshort from 2/1-2, possible partial cover. 


Also, VIX yesterday above YP & 1HP both at 27.46. So what's bullish for VIX (above pivots) is of course bearish for stocks, and vice-versa. 

Lastly, oil on both continuous and current contracts on the YS1s. CL1 YS1 26.69, 1HS1 27.89.

Volume shifting into the J contract, showing the daily chart here.

Lastly, TLT and other bond vehicles (ironically, ZN futs and TYX, charts not shown) each tagged yearly levels yesterday with some rejection. 

My bias is this isn't the final low for the year, but when we do have it it will be something like multiple yearly or perhaps half year levels testing and holding like potentially today. 

Filters

Pivots work well a lot of the time, but even with a good method there can be some false signals. For example, yesterday SPY looked to be lifting from the FebP. As this was the first change of pivot status since 1/6, this appeared to be at least somewhat bullish - keeping in mind that SPY was still well below the more important longer term levels of the yearly and half-year pivot. That said, with nearly all stock indexes and ETFs rallying from yearly levels, one could have easily thought the bounce would go further. As it turns out, the market will open lower today and while SPY will still be within striking distance of the pivot, SPX and ES are clearly below. 

If you looked at the SPY bar and reduced hedges or shorts based on first daily close above the pivot, then you'd have to be thinking about putting them back on today depending on the close. The main point of this post is to consider ways we can reduce false signals. This takes a bit of work, but those who like to understand the market and have fewer wrong moves will benefit. But if you don't have a lot of time, still I suggest #1 and #2. 

1. All variants of asset
Check all variants of the asset you are trading. This involves just a bit more work, but I think the result is higher confidence setups when they are all clear. For example, I refer a lot to SPY here but the cash index SPX is really the base for the ETF; and there is quite a lot of trading on the ES futures contract. As most people know, these are all related and exactly what I mean by "all variants of the asset." So there is a similar point on QQQ / NDX / NQ; DIA / INDU / YM; the Russell and TF futures; and the list goes on in bonds and commodities. For example, showing the SPY / ES / SPX all below. 

SPY looks more like lifting from pivot support. However, both the ES and SPX look like small blue bars (weak buying) which changes the picture. Weak buying from support is more vulnerable to a break just like weak selling above support increases the chance of a bounce. So if 2/3 of the variants are not clear, then maybe wait a day or adjust positioning in a similar fraction.

2. Volume
Check the volume bars on SPY and ES above. You can see that despite the first of the month which is often active, volume on both was low. In fact, both appear to the lowest volume up day of the year. Now judgement of volume can be more complex at times, meaning sometimes a volume spike is a turn and sometimes it takes divergence (ie higher highs in price with lower volume, or lower lows) but low volume buying is just not what you want to see on a bounce if you are playing for higher.

3. RSI
There are a lot of technical tools out there, but I had to add one it would probably be RSI. I know lots of people use MAs, and they can be somewhat useful, but once you start looking at different timeframes there are MA lines everywhere. Check this hourly chart of SPY and RSI on Friday and Monday was the highest it has been since 12/28. Not a great place to buy in a overall down trending market. 

4. VIX and other safe havens
I like pivots on VIX quite a lot. On VIX, it indeed dropped from the FebP which does look bullish, but bang on to the more important Q1P. So a reason to perhaps wait one more day. XIV really nailed it this time, with resistance bang on the FebP. In other words, using VIX you had a sign of caution (ie don't buy stocks with VIX on larger support) and using XIV you would have correctly NOT changed positioning (either by adding longs playing for a bounce or reducing shorts / hedges). Additionally, sometimes TLT or other bond vehicles can help confirm stock positioning.


5. Watch correlated assets
Obviously there has been a lot of selling pressure due to oil and China this year. Yesterday, oil was down about 7% and below all pivots while stocks were fractionally up and most barely above FebPs. In fact, the broader market only stabilized when CLH6 held its YS1 on 1/20-21. China in the form of Shanghai Class A index (what is available on tradingview) and FXI both below all pivots. In other words, factors that have produced selling pressure were still clearly vulnerable as of Monday. 

Big levels

The amount of indexes or ETFs that turned from long term levels - by this I mean yearly or half-year pivots - is rather amazing. These weeks are rare. The odds favor more on the bounce, but how far it gets we shall see - and use the shorter term pivots, especially the FebPs which will be in play in about a week - to gauge the strength. Of course all the levels below that broke and recovered by the weekly close will have to hold.

All charts weekly with year and half-year levels only (no quarterly or monthly). Listing comments first, then the charts. If you get confused to which is which, look for the light grey watermark of sorts identifying the index / ETF.

This post has gotten quite long, and I still didn't cover two categories - currencies and commodities namely, oil. I will do another post on that soon, but check the recent blog post on oil that pointed to the key level YS1 a day before the low!

USA mains stock indexes & ETFs
SPX / SPY / ES - all broke YS1s & 1HS1s, but recovered on close (hard to see 1HS1 on chart b/c so close to YS1)

NDX / QQQ / NQ - low on NDX near exact, QQQ disparate structure ie not on YS1, NQ more like ES

INDU / DIA - lows on YS1 & 1HS1 combo

RTY / IWM held YS2 / 1HS2 combo area. (Note: these two charts added on 1/27.)

NYA - recovered YS1, but still a fraction under 1HS1

USA additional stock indexes & ETFs
IBB - weaker bounce off YS1

SOXX - better move up from 1HS1. The Pivotal Perspective prefers SOXX over IBB here.

XLE - also YS1 low and recovery of 1HS1 

XLF - I don't know what to make of pivots this year due to massive 8/24 spike, so not showing here

Safe havens & risk indicators
TYX - just slightly below its YP; recovery would put in back in congestion zone above YP but below 1HP; below YP remains bearish yield and bullish bonds. 

TNX - rebounded from 1HS1

TLT - high on 1HR1 near exact

ZB - high on YR1 / 1HR1 combo, but could be pause and not rejection.

ZN - also high on YR1 / 1HR1 combo, but also perhaps pause and not rejection.

HYG - low on 1HS1

VIX - poked above, but did not close above, the YP for the last 2 weeks. decent reversal from the YP although some may point to closing below the low of last week as confirmation, which hasn't happened yet.

XIV - near test of YS1, no official tag however

GLD - rather awful that GLD could not climb above 1HP in all the turmoil

Global stock ETFs
EWJ - held YS1 and 1HS1

EWG - held YS1 and 1HS1

FXI - holding 1HS1 but not much green 

EEM - similar to FXI

PIN - low on 1HS1 exact

RSX - low on YS1 and decent bounce along with oil

ACWI - global benchmark ETF, also low on YS1 & 1HS1 combo