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>From the VIX Man: ramblins and three charts on three posts.
The sell signal alert on Wednesday and activated intraday on Thursday was
followed by more selling on Friday. As of the close on Friday the VIX Z
score traversed up to neutral. The five day component dropped to oversold
zone 2 while the 20 day dropped into the neutral zone 3(oversold side of
neutral). The 90 day shows signs of dropping off of extremely overbought.
This leaves the market oversold short term, neutral intermediate term,
overbought longterm. The five day reverses more often in zone 3 than zone 2
and the VIX Zone score tends to reverse more often in the +1 to +2
level(right axis). Looking at it from a trend standpoint, the 5 and 20 are
down and the VIX Z is up and the 90 is still "up". This votes for a little
more selling or consolidation at the least.
On the Modified VIX front an outlier was reached. An outlier is a data
point that only has a 2 to 5% probability of occurring. The MVI chart
shows the +1.618 band being tagged first at overbought where the sell
signal was activated and then the result of Thursday and Friday's selloff.
It closed on a -3 std dev band. On the raw VIX chart a transition was made
across the entire 4 std dev bandwidth. That is crash mode behaviour.
Well, what happens next will really determine that. Theory says a close
outside the band is a continuation of the trend and a close back inside is
a reversal. The MVI will follow the VIX and OEX since it is a derivative
of both. The weakness in the logic here is, which band std dev to use.
Also Friday's action had the VIX reach +2 std dev intraday and then pull
back to +1 std dev. This might qualify for an exhaustion move, a pre
expiration week move and all that implies.
A third momentum chart has been added to illustrate the relationship
between interest rate momentum and price momentum. This may at first be
viewed with a bit of confusion. It is pretty common knowledge that 30 yr
yields and equities have a close link. Just how close becomes more
apparant when you overlay a yield oscillator with an equity oscillator.
There are times when yields rise and equities rise simultaneously, but if
yields continue to rise to far or for too many days, equities enter a
consolidation or correction. One safe way to control risk exposure in long
and short positions is to select the times when the two oscillators are in
a favorable relationship. Looking at the overlayed oscillators it becomes
apparant that low risk in equities occurs when yields are trending down and
high risk is when they are trending up. Equities can tolerate a slight
amount of interest rate rise, but if it occurs too fast and for too many
days, equities are vulnerable to a correction or consolidation at the
least. Last week yields had been rising for six days. Equities rose for
four days and finally gave up on the fifth and sixth. Had a trader avoided
exposure during the last 6 day period of high risk he would have been
relaxed on Thursday and Friday.
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