Thursday, December 03, 2009

VIX Filled the Gap

I thought it was interesting that the VIX went back and perfectly filled the gap it made on the Dubai panic last week. I'm not sure if the concept of a "gap fill" even makes sense for the volatility index (VIX) but heck, how much "sense" does it make with stocks either. Fact is, a huge gap showed up in the chart and precisely after it was filled the VIX made a huge move higher. Maybe we shouldn't be suprised that the VIX dropped so much following that gap up, after all, the S&P 500 and the Dow Jones both made new 52 week highs today. On the other hand, thats a pretty huge and seemingly significant divergence that the S&P 500 made a new cycle high while the VIX made a low which was 3% higher than its cycle low. Thats not necessarily a sell signal for the S&P but its a big red flag.

Point is, if the VIX were a stock I'd buy it with a stop at today's low and a target at the 200 dma (currently about 30). It will be interesting to see if this turns out to be a long term bottom for the VIX following two tests of the 20 level. A sharply rising VIX would be bearish for stocks and extremely bullish for put options. However, a volatile VIX is a headache.

Disclosure: I own SPY puts

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