Spot VIX. Daily view.
The VIX is beginning to behave like it did in 2020-2021. A bullish RSI divergence is beginning to form. The RSI is trending slightly higher while the VIX is trending down. Usually, this is the first step to a VIX spike to form. That doesn't mean a large VIX spike might happen tomorrow. Usually, this pattern takes several days to resolve.
I say first step because the VIX has a certain "dance" to it. The next step is for the VIX to create higher lows. Usually, 3-5 higher lows would create the bigger spike.
The reason why the VIX floated for most of 2022 is due to the market that it reflects. The VIX calculates the amount of hedges in the options market of SPX/ES or equivalent. Simply put, when cash is in demand or futures are used as hedges, that means hedges in options are not being bought up. When there are less options bought as hedges, this mutes the VIX spike. This type of floating action happened in most of 2008, 2015, and 2018. So, it's actually nothing new.
However, as the DX (dollar strength) goes down, it means that there is less demand for cash... which means more money is flowing into derivatives.
The red line that I have served me well for VIX shorts. However, I have this red line expiring around September/October which is just in time.
What I am looking for is an oversized VIX spike. What do I mean by that? I mean if the VIX spikes more than 3 standard deviations, but the SPX/ES didn't drop as much (e.g. only 7%).
Why is that? It will likely mean the bear market in ES/SPX would be over. It means cash is not in hot demand as it was between January to July. Cash doesn't disappear out of thin air. It goes somewhere else.
If I am reading this pattern right, then we should see a spike in September. There is a possibility of near the end of August. However, it's still too early to tell. I rather be patient and let the market tell me what to do. Those who keep telling the market what to do usually do not last very long.
The VIX is beginning to behave like it did in 2020-2021. A bullish RSI divergence is beginning to form. The RSI is trending slightly higher while the VIX is trending down. Usually, this is the first step to a VIX spike to form. That doesn't mean a large VIX spike might happen tomorrow. Usually, this pattern takes several days to resolve.
I say first step because the VIX has a certain "dance" to it. The next step is for the VIX to create higher lows. Usually, 3-5 higher lows would create the bigger spike.
The reason why the VIX floated for most of 2022 is due to the market that it reflects. The VIX calculates the amount of hedges in the options market of SPX/ES or equivalent. Simply put, when cash is in demand or futures are used as hedges, that means hedges in options are not being bought up. When there are less options bought as hedges, this mutes the VIX spike. This type of floating action happened in most of 2008, 2015, and 2018. So, it's actually nothing new.
However, as the DX (dollar strength) goes down, it means that there is less demand for cash... which means more money is flowing into derivatives.
The red line that I have served me well for VIX shorts. However, I have this red line expiring around September/October which is just in time.
What I am looking for is an oversized VIX spike. What do I mean by that? I mean if the VIX spikes more than 3 standard deviations, but the SPX/ES didn't drop as much (e.g. only 7%).
Why is that? It will likely mean the bear market in ES/SPX would be over. It means cash is not in hot demand as it was between January to July. Cash doesn't disappear out of thin air. It goes somewhere else.
If I am reading this pattern right, then we should see a spike in September. There is a possibility of near the end of August. However, it's still too early to tell. I rather be patient and let the market tell me what to do. Those who keep telling the market what to do usually do not last very long.