One month later, the VIX continues to give us great trading setupsAug 06, 2012
Chad Karnes, CMT
News has been negative all year, but the stock markets are still up. There may be plenty of reasons to fade this year's rally as the VIX is giving us some insight into the market's true intentions.
On July 9 we wrote an article on the VIX that identified a high probability trading setup. Today, we are again seeing that familiar setup.
Similar to that July time period, negative news headlines and supposed fear have not let up. But, like early July, the VIX is still hovering near yearly lows and not confirming the fear that is prevalent in the news. Something is amiss.
More Headline Risk
Even as the negative headlines still dominate the media in early August, the VIX’s price under $16 has not confirmed such a bleak outlook:
“Jobs Engine at a Crawl” – Barron’s, August 6, 2012
“Europe in Crisis, Can Central Bankers hold EU Together?” – FuturesMag, August 2012
“US Manufacturing Contracts Again” – CNN, August 1, 2012
Given the negative news environment, an expected sky-high VIX would not seem out of the question. However, this simply has not been the case as the VIX sits near its yearly lows and actually shows that investors are not really worried.
Time to Buy the VIX again?
The U.S. stock market (NYSEArca: DIA) has declined from its April highs, but it's still ahead an admirable 8.8% year-to-date. Investors following the news might be perplexed by this apparent contradiction, but the ETF Profit Strategy newsletter sees it as an opportunity as the VIX provides us another great trading setup.
Examining the VIX and its relationship to the market, on 7/22 we stated in the ETF Profit Strategy Update, “Discussed in the 7/8 TF (Technical Forecast), a dip down below the 16 level is what we wanted which would signal complacency. This occurred on Thursday (7/19) and also coincided with the market’s top on Thursday (7/19). The VIX is confirming a potential (S&P 500) top here.” We also commented, “A breakout above the resistance red trendline currently at 17, that has now held numerous times the past two months, will give us a high probability buy signal on the VIX. This will set up a pretty high reward:risk trade.” On 7/24 the VIX closed at $20.47.
The ETF Profit Strategy Update is seeing a similar trade setup again. The below chart shows some of that VIX analysis and highlights some of the levels we are monitoring.
(to see a larger version of the chart click here.)
If used correctly, the VIX can help you spot potential market turning points and show when sentiment is at extremes. Some ETFs that can be used to take advantage of our VIX trade are the ProShares VIX Short-Term Futures ETF (NYSEArca: VIXY), the ProShares Short VIX Short-Term Futures ETF (NYSEArca: SVXY), and the ProShares Ultra VIX Short-Term Futures ETF (NYSEArca: UVXY). The ETF Profit Strategy Update is continuously analyzing the VIX and other markets in order to help keep profits larger and reduce trading risk for both short term aggressive traders as well as more conservative investors .
The VIX resistance and analysis was not created out of thin air. There is a method to our trade setups and each month the ETF Profit Strategy Newsletter, and a few times a week via the Technical Forecast, uses key indicators like sentiment, and breadth analysis to identify high probability trading setups for the S&P 500 (NYSEArca: IVV), the VIX, and other indices and ETFs.