Keep an eye on the VIX. If it happens to rise above its July 24 high at about 56.75, and the OEX or SPX remain above their July 24 lows, that would be a very bullish divergence, IMO. Such an occurence would tell me that exceptionally high volatility is not translating into lower stock prices - ergo the market 'can't go lower.' Counterpoint?
BTW the reason I brought this topic up was that I was noticing that the VIX has already gained back more than half (roughly 55% to be precise) of the amount it lost when the market rallied after July 24, while the SPX and OEX have each lost only 38% (hmmm) of their big rallies. So the divergence is already noticable. But I'd like to see confirmation with the VIX taking out its July 24 high.
I'm curious, why should there be any 1-to-1 correlation between the movement of VIX and SPX or OEX? The last time I checked, there isn't anywhere close to a significant relationship between the two.
I'm looking at the VIX like an oscillator. It is relatively closer to its recent peak than the OEX is to its recent oversold low. I'm just "eyeing" the two and it "looks" like the VIX has a shot at taking out its high before the OEX (or SPX) reach their low.
I don't see why it would be any useful than the channels that all instruments are bound to form at some point (even random walk series form wonderful technical patterns). Yet, it is dubious at best to use VIX at an indicator of any value. It has some merit when it comes to predict volatility (by some, I mean very little). Whatever pattern, relationship, or momentary corrolation with stocks and indexes is purely random. Just my thoughts.
How bout the Nasdaq breaks fresh lows next week, while the VXN just crawls its way higher or stays sideways?
The divergence is there, you are correct. It is worth noting that the VIX is indicating a significantly higher premium now than when it climbed the first time. This shoud result in a new high for the VIX without taking out the prior index lows.
A friend of mine once told me that one of his trade setups was to buy the S&P whenever the VIX closed above 35 and to sell it when it closed below 28 (or maybe it was 26, I can't remember for sure). Anyway, he said that it worked about 80% of the time but that he rarely bought the bottom and usually had to hold through decent sized drawdowns (as it would be right now). He is a position trader who uses 10 or 12 setups to enter the market and weights his positions by how many of his setups are in effect at the time. So with his size he was able to weather the drawdowns. I haven't tested it out because my time frame is much shorter and my drawdown tolerance is much less, but from eyeballing the chart it seems to work a lot of the time. It doesn't happen very often though, maybe a couple of times a year.