Market volatility is ready to spike higher again.
That may sound ridiculous to most traders. After all, there hasn’t been any volatility lately.
For the past two weeks, the S&P 500 has traded in its most narrow trading range of the year. And the Volatility Index (VIX) is trading below 10 and is near its lowest level of the past 20 years.
But the VIX has been in this condition several times this year. Each time led to a sudden one- or two-day spike higher in volatility, and a corresponding sharp drop in the stock market.
The last time, for example, was back on September 4 – when, it just so happens, was the last time I wrote about the VIX and the possibility of a spike higher. Within just two days, the VIX spiked 40% higher and the S&P 500 traded as much as 28 points lower.
The same conditions that existed back then exist today as well. Not only are VIX call options far more expensive than the equivalent VIX put options (the VIX October 18 $10 calls closed yesterday at $2.40 while the VIX October 18 $10 puts closed at $0.05 – please re-read the September 4 Market Minute for more detail), but also the technical setup on the VIX looks bullish.
Here’s the 60-minute chart of the VIX…
For the past 10 days, this chart has been forming a bullish falling wedge pattern with positive divergence on the MACD momentum indicator. This sort of pattern almost always breaks out to the upside in a quick, sudden move.
So, this chart supports what VIX option prices are telling us – that the VIX is more likely to be higher in a few days than lower. And, since this is a 60-minute chart pattern, it is likely to play out within the next three to five trading days.
The stock market has been strong lately. Heck, the S&P 500 closed at a new all-time high on Wednesday. And the Volatility Index (VIX) closed in single digits yesterday. So, the bulls are feeling pretty comfortable and complacent.
That’s a dangerous combination. And, when we’ve seen it several times previously this year, it has usually resulted in at least a quick and sharp rise in the VIX and a drop in the broad stock market.
Best regards and good trading,
P.S. Do you think conditions support a higher VIX in the next week? Or is this bull market as unstoppable as it seems? Send me your thoughts – along with any questions, comments, or suggestions – right here.
In today’s mailbag, readers offer their thoughts on looking back at past trades…
I appreciated your illustration of “looking back” either causing overconfidence in future trading or regrets that you could have made more by hanging on a little longer to make a little more. In my trading, I have found this to be true and also in life in past decisions that maybe weren’t so good. The past cannot be changed no matter the regrets. Lessons from the past should help us make better decisions for the future!
I think it may be useful to “look back” as a performance check. For example, if you were to look at all closed trades a week after exit and found that you could have made 50% or more (consistently) by hanging on, then you may want to revise your target-setting procedure. It's somewhat analogous to Alexander Elder's recommendation to review “every trade a month or two after you exit” to check what you did right or wrong, but not to dwell on the money you left on the table.
To look back is at best a monumental waste of time. Like crying over spilled milk. There is nothing to gain from it. Not only is the time wasted but so is any attempt to “learn” from the experience – for the reasons you mention. If the devil ever advises to look back, take the angel’s advice instead: look forward. Not back.
Thank you for your excellent trading system. I have been using it for about two years now and executed many trades as you recommended (about 90 in 2016 at Stansberry and 60 in 2017 so far) with a success rate of about 80%. This is fantastic. I made money on ORCL.
Thank you for your hard work and insights. I look back to see what worked and what did not, and not necessarily how much.
Now I am limiting the SIZE of my trades when buying calls and stocks. I think you also have recently warned traders to limit exposure to such trades. Thank you again.
Took me years to learn to take a loss and move on; tying up capital because “the market is wrong” is not productive. The key is “the long run.” That is the holy grail – betting small and always moving on; capitalizing experience BUT MOVING ON.
Thank you for your trading passion. Your approach is quite sound when it is disciplined ruthlessly.
Essentially not looking back is sound I think, for the reasons you give. It can be helpful though to see if you can spot why the setup was wrong. Sometimes it wasn't wrong… it was just one of those things where the market does something “stupid.”
But if by looking back you can see if it was your own fault for not following charts properly, drawing sloppy trendlines, etc. or just generally ignoring your own trading rules – not lining up all the ducks – it could be instructive.
There is a theory that you can learn more from your mistakes than your successes. Most theories have some truth to them. I think perhaps the key is to… glance back, but not look too hard.