This is the first time I recall a VIX Buy Signal following a Sell Signal in such short succession. Can it be trusted? Did I miss the pre-Santa-Rally dip? Is it too late to load up on long positions? So many nagging questions but as usual Mike’s got you covered:

Let’s start with realized volatility, also known as historical volatility. The two spikes on my slightly modded ATR (which shows moves in ticks/pips) show us exploding from < 20 tick hourly candles into 40+ tick candles. In the end we lost 85 handles on the SPX in two sessions.

What usually happens is that everyone’s stops get cleaned out and once a credible looking floor develops volatility begins to subside as buyers try their luck at catching the dips. From here they either get run over as the next selling phase sets in or a crucial buy threshold is breached which signals to everyone that the worst may be over.

What I like here the most is that RV seems to be dropping continuously (red arrows) but I would not automatically assume that we are now heading higher on auto-pilot.

Here’s the VIX, which of course expresses summary implied volatility courtesy of CBOE option prices. Those gaps you see are indeed signs that we may have been through a pre-holiday shake out. But there usually is at least one encore which tests the mettle of early buyers.

I mentioned the SPX:VIX ratio on Wednesday morning as it had been pointing down since Thursday evening and only had to begin to point up after the Tuesday gap down.

Unfortunately since then the SPX:VIX has been trailing the index again which does not give me a lot of confidence, at least at this very stage.

Nevertheless technically speaking we are now looking at a bonafide VIX Buy Signal. However it comes one week after a Sell Signal that was a long time in the making.

And then there’s the IVTS which yet has to give us confirmation…
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Since the long march below the 0.8 mark during 2016 and 2017 I’ve gotten a bit more cautious about using that threshold as a sell signal. Nevertheless a reversal from 0.81 into 0.9 is usually a good sign and a second close above the mark increases the odds of continuation higher.

But we are not there just yet and given that week #50 historically closes in the negative – and that 58% of the time – gives us cause for caution.

Here’s another perspective on the same theme – I’ve been playing with some Bollingers which are of course not a super reliable guide as neither the VIX or the VXV are normally distributed.

Nevertheless the ratio seems to abide by the upper 1.5 std deviation threshold as I’ve attempted to show via the green vertical lines near recent buying opportunities. Note that a re-entry below that threshold is needed, which yet has to occur if I’m looking at this correctly.

Bottom Line:

If you’ve bought the dip and are holding then never mind any of this and let your stops do the talking. However if you’ve missed the bus earlier this week then console yourself by the possibility of another retest of the recent lows. It’s not guaranteed of course but given the above it’s got at least a 50% chance.

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