Last week we noted: “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 is a weekly chart of the SP500 with the $VIX in the lower panel that we showed in last week’s report. The break below and then above a key pivot point (i.e., the black dots on the $VIX) is suggestive of a reversal, and this appears to be happening.
As stated last week, “the rally is running out of steam, and there is a real possibility of a trend change.” This week’s price action in the $VIX is adding confirmation to these observations.
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