In March 2013 the VIX did something it had not done in over six
years. It closed below $12.
This six year low in March was accompanied by a new all time
closing high in the market as the S&P surpassed its 2007 price
high of 1565.
Since then the VIX has seen its fair shares of ups and downs,
but interestingly it has yet to reach lower levels than it did back
It has also found support numerous times since then, setting up
a high probability trade opportunity.
New Market Highs yet No New VIX Lows
Even though the S&P has added over 200 points since March's VIX
low of $11.05, the VIX has yet to confirm the market's rally by
making a new low itself.
Flipping the VIX
Typically the VIX (CHICAGOOPTIONS:^VIX) falls when the market
rallies and rises when the market falls, and generally this is the
case and has been the reality over the past year. In
technical analysis this is called confirming, which is when two
highly correlated assets are behaving as expected confirming one
However, the VIX (NYSEARCA:VXX) also typically makes lower lows
when the market makes higher highs and makes higher highs as the
market makes new lows, and this is something that has not been
occurring. In technical analysis this is called diverging
which occurs when two typically highly correlated assets are not
confirming one another.
Sometimes the easiest way to view these relationships in action
is by looking at price history, which I show and label in the chart
The VIX Setup
In the chart above there are six major talking points that help
us reconcile the VIX's current trade setup.
1) In March, new six year lows were made on the VIX which
accompanied a new all time high in the S&P (NYSEARCA:SPY) -
This is what would be expected
2) In April, May, August, September, and again now in November,
new all time high S&P prices were made, yet the VIX did not
make new lows - This is not expected, but presents opportunity
3) Since the 6 year VIX low in March and shown below the green
zone, the VIX has yet to close below $12. Support has
always come in at $12 or above, keeping risk of loss low
4) Shown by the green zone, the VIX has also spent very few days
in the $12-$13 zone. It usually rallies from this level,
also keeping risk of loss low
5) When the VIX rallies, it usually pops very quickly, often
headed to the upper teens just as it did in April, June,
September, and October. This helps us identify a profit
6) The VIX rallies around every two months as shown by the
black vertical lines (40 trading days). The next timing of
the VIX rally cycle is mid-December
The VIX Trade in Action
As you can see, this VIX (NYSEARCA:UVXY) setup is not new. It
has been occurring since March of this year, right where we
identified the opportunity in our June ETF Profit Strategy
Newsletter published 5/24.
Our trade alert was buying the VIX July $13 call options for
$370. We sold half that position one month later for an 84%
gain as the VIX rallied into the upper teens. We sold the remaining
half on 7/5 for another 22% gain.
Again in September, as the VIX creeped back toward its support
zone, we saw a similar setup, pocketing a 31% gain along with
numerous other VIX (NYSEARCA:TVIX) trades this year captured in our
twice weekly Technical Forecast.
This setup has offered multiple profit opportunities as the
VIX looks to be in a similar situation now again.
The Two Month VIX Cycle
Not only has the VIX been a good option to hedge your portfolio
when it falls below $13, it has shown to be a reliable two month
cycle as mentioned above, offering speculators excellent
opportunity for profits.
That two month cycle results in another expected VIX
(NYSEARCA:USMV) pop by mid-December. What just so
happens to be coming up in mid-December?
The next deadline for U.S. Budget Negotiations is scheduled for
December 13, 2013. Given the VIX's history, current technical
setups, and reliable cyclicality, December again is expected to
bring some fireworks to the markets with theVIX in position to
benefit the most.
Profit Strategy Newsletter
uses technical, fundamental, and sentiment data to keep you on the
right side of the market and in profitable trades. Combining the
VIX's technical setup with the upcoming budget battle presents yet
another great VIX opportunity. Trade setups and updates can be
found in our monthly Newsletter, weekly Picks, and twice weekly
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