“Rather than love, than money, than fame, give me truth.” Henry David Thoreau
“Veritas Nunquam Perit”- “The Truth Never Perishes” Seneca (the younger)
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There is only one side to the market, and that’s the right side. Jesse L. Livermore
“There is nothing new in Wall Street. Whatever happens today, has happened before and will happen again.”Jesse L. Livermore
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Primary Trend: Completing Primary Trend TOP
Intermediate-Term: ~ Seven Sentinels Uptrend, 10-20-19, SPX 2970
LOLR Trend: ~ Downtrend – 10 AM, 12-4-19 – SPX 3232
Trades:
Trading Position: 25% TVIX, 23% TZA
Stops: TZA 33.87
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Most traders understand VIX, as well as some basics about what VIX tells us. But the fact is that “the crowd” is clueless as to the Truth VIX provides serious traders- a truth that can transform a trader from one who constantly tries to outsmart markets with individual trades – to a trader who, like Livermore, learns to be right and sit tight. Regarding this little-appreciated but critical element of success, Livermore often wrote: “Once I learned this, millions came easier than hundreds had before.”
Note: If the reader clicks on “the crowd” hyperlink in the prior paragraph, this takes the reader (FREE) to the most magnificent treatise ever put to pen on the strangely hypnotic impact of “crowd-think” on otherwise entirely rational and intelligent humans. When one becomes caught up in a crowd or a mob, one engages destructive thoughts and behavior of which no single individual would even dream absent this contagion!
Today we’ll offer that Truth in the most explicit terms we are able.
StockCharts.com glossary says this about VIX:
“Volatility Index ($VIX)
The Market Volatility Index (VIX) measures the volatility of the market. A recent news story described it as “the options market’s gauge of investor fear.” Traders use VIX as a general inverse indicator of market volatility and sentiment. High numbers mean that there’s excess bearishness, while low numbers indicate excess bullishness. Created in 1993, the VIX is updated intraday by the Chicago Board Options Exchange (CBOE) using Standard & Poors 500 Index (SPX) bid/ask quotes.” {Prior to 1993, VXO measured volatility}
Even “the crowd” understands most of those basics- that VIX tends to fall as markets advance and moves up as markets decline. Most also know that a low VIX indicates low fear levels among the trading crowd and that high readings reflect high fear levels among this same crowd, and that absence of fear is as dangerous as is an excess of greed.
For most, however, that’s the extent of VIX understanding. What the above fails to reveal is what happens when VIX defies this relationship. What happens when the rules invert and VIX advances with SPX and the DJIA? The answer provides one of the most powerful tools a trader can own!
We’ll explain the single most crucial application of VIX- for those of us who wish to go far beyond amateur status and endeavor to achieve life-altering success.
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In the simplest of explanations, something that is completely antithetical to the “normal” behavior of VIX occurs as markets come into Primary Tops. Rather than trending lower as markets trend higher, in the weeks and days coming into a final TOP, VIX advances as price advances.
Why? Again in the simplest of explanations, it’s because the “one-percenter” portion of traders and investors, the “ultra-smart money” if you will, is seeing enormous trouble ahead for the market and is “distributing” stock. Instead of a declining volatility TREND, bouts of heavy selling in crucial issues that take them down quickly- are showing up on the tape and altering this “normal” relationship. Prices recover and even make further new highs. More and more such “bouts” of selling and recovery hit critical issues, resulting in, overall, a steady increase in volatility. VIX reflects this and is now trending up even as the DJIA and SPX trend higher.
The Primary Tops in 1987, 2000, 2007, 2015, 2018 at the beginning of this two year top, and NOW at the end of this two year top are displayed below. The run-up in Volatility into the final peak is clear.
For each example, we showed a close up of VXO or VIX as it set up in the days leading into the top side-by-side with the more significant decline that followed in days, weeks, months that followed. (can be viewed on big monitor screens)
In each, we note that VXO or VIX, which had been declining during the BULL market that led to this top, suddenly shifts trend.
VXO/VIX unmistakably advances into the DJIA/SPX TOP:
1987:
2000:
2007:
2015:
2018:
2020:
In concert with Record Bullish Sentiment and Flagging Momentum, VIX is providing serious traders a powerful message regarding 2020 and the years well into this decade. In 1929 Livermore saw the handwriting of the wall for the decade of the 1930s. He knew that this was the time to think in terms of “being right and sitting tight.”
He finished that 1929-1932 Bear Market with over $100 Million in 1932 dollars- or $1.2 Billion in 2020 dollars. We are certain that if Livermore looked today at the message from VIX, he’d know what to do.
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All of the above tells us where we are in the cycle of the market. They do not pinpoint the turn. That will come when the Daily and the LOLR Sentinels both produce SELL Signals. That point is close. How close? Maybe weeks, perhaps just hours. Our Sentinels will answer that question in the weeks ahead.”
Here, for example, are the two-hour LOLR Sentinels. When all of the short-term moving averages cross below the longer-term MAs, this will produce a SELL Signal.
These Daily Sentinels are even closer to a SELL Signal than the two-hour:
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