VIX and More...Short Term Negative

The setup discussed on Thursday arguing for a higher close in the short term was fulfilled successfully on Friday. In that blog entry, i also pointed to a previous gap-up related study that argued for a lower close in the short term should be close up Friday. Given that we did close up Friday, i'd like to present that study once more.
On Thursday, the S&P painted a gap and run candle (Thursday's low was higher than the previous day's high). This was followed Friday by yet another higher close. Surprisingly, since 1990, there have only been 11 similar occurrences. In 10 out of 11 cases, the market was trading lower within 3 days.

(Note: column '3Day+' displays the number of days it took the S&P to close higher within the next 3 days. a value of 0 indicates the market did not close lower within 3 days)

Ticker	Date/Time	Close	3Day-	%Chg N1	%Chg N2	%Chg N3
SP500	10/2/1990	315.21	1.00	-1.21	-0.80	-1.18
SP500	6/15/1992	410.29	1.00	-0.48	-1.96	-2.27
SP500	10/18/1996	710.82	1.00	-0.14	-0.60	-0.50
SP500	9/27/2007	1,531.38	1.00	-0.30	1.02	1.00
SP500	11/29/2007	1,469.72	3.00	0.78	0.18	-0.47
SP500	12/24/2007	1,496.45	2.00	0.08	-1.35	-1.20
SP500	4/3/2009	842.50	1.00	-0.83	-3.20	-2.06
SP500	4/13/2009	858.73	1.00	-2.01	-0.78	0.77
SP500	6/2/2009	944.74	1.00	-1.37	-0.24	-0.49
SP500	7/16/2009	940.74	1.00	-0.04	1.10	1.47
SP500	9/9/2009	1,033.37	0.00	1.04	0.91	1.55
SP500	10/9/2009	1,071.49	0.00	0.00	0.00	0.00

Over the past 5 days, we have seen the VXO (the 'old' VIX) decline over 20% (on a closing basis). This presents another high probability short setup. There have been 61 similar occurrences over the past decade where the VXO has retraced more than 20% in one week. In 52 cases (or 85.25% of the time) , the S&P 500 was trading lower within 3 days.

Ticker	Date/Time	Close	3Day-	%Chg N1	%Chg N2	%Chg N3
SP500	6/21/1999	1,349.00	1.00	-0.97	-1.18	-2.46
SP500	6/22/1999	1,335.88	1.00	-0.21	-1.50	-1.54
SP500	8/17/1999	1,344.16	1.00	-0.84	-1.53	-0.56
SP500	10/22/1999	1,301.65	1.00	-0.62	-1.52	-0.38
SP500	2/4/2000	1,424.37	1.00	-0.01	1.22	-0.89
SP500	3/3/2000	1,409.17	1.00	-1.27	-3.80	-3.01
SP500	4/24/2000	1,429.86	0.00	3.33	2.18	2.45
SP500	9/27/2001	1,018.61	0.00	2.19	1.96	3.21
SP500	9/28/2001	1,040.94	1.00	-0.23	1.00	3.01
SP500	2/13/2002	1,118.51	1.00	-0.18	-1.28	-3.14
SP500	7/29/2002	898.96	3.00	0.42	1.41	-1.59
SP500	7/30/2002	902.78	2.00	0.98	-2.01	-4.27
SP500	7/31/2002	911.62	1.00	-2.96	-5.20	-8.45
SP500	8/19/2002	950.70	1.00	-1.40	-0.14	1.26
SP500	11/20/2002	914.15	0.00	2.15	1.79	2.05
SP500	3/29/2004	1,122.47	0.00	0.40	0.33	0.86
SP500	3/30/2004	1,127.00	1.00	-0.07	0.46	1.31
SP500	5/19/2005	1,191.08	1.00	-0.15	0.23	0.25
SP500	5/20/2005	1,189.28	0.00	0.39	0.40	0.06
SP500	5/23/2005	1,193.86	2.00	0.02	-0.32	0.31
SP500	11/3/2005	1,219.94	3.00	0.02	0.24	-0.11
SP500	6/20/2006	1,240.12	0.00	0.97	0.44	0.35
SP500	6/21/2006	1,252.20	1.00	-0.53	-0.61	-0.13
SP500	7/25/2006	1,268.88	1.00	-0.04	-0.45	0.76
SP500	8/18/2006	1,302.30	1.00	-0.37	-0.27	-0.71
SP500	3/9/2007	1,402.84	2.00	0.27	-1.77	-1.12
SP500	3/12/2007	1,406.60	1.00	-2.04	-1.38	-1.02
SP500	3/20/2007	1,410.94	0.00	1.71	1.67	1.78
SP500	3/21/2007	1,435.04	1.00	-0.03	0.07	0.17
SP500	3/23/2007	1,436.11	2.00	0.10	-0.52	-1.31
SP500	6/19/2007	1,533.70	1.00	-1.36	-0.75	-2.03
SP500	7/3/2007	1,524.87	0.00	0.03	0.37	0.46
SP500	8/22/2007	1,464.07	1.00	-0.11	1.05	0.19
SP500	8/23/2007	1,462.50	3.00	1.15	0.29	-2.06
SP500	8/24/2007	1,479.37	1.00	-0.85	-3.18	-1.06
SP500	9/19/2007	1,529.03	1.00	-0.67	-0.21	-0.74
SP500	9/21/2007	1,525.75	1.00	-0.53	-0.56	-0.02
SP500	9/24/2007	1,517.73	1.00	-0.03	0.51	0.90
SP500	12/21/2007	1,484.46	3.00	0.81	0.89	-0.55
SP500	12/24/2007	1,496.45	2.00	0.08	-1.35	-1.20
SP500	12/26/2007	1,497.66	1.00	-1.43	-1.28	-1.96
SP500	2/1/2008	1,395.42	1.00	-1.05	-4.21	-4.94
SP500	3/24/2008	1,349.88	2.00	0.23	-0.65	-1.79
SP500	3/25/2008	1,352.99	1.00	-0.88	-2.01	-2.79
SP500	4/18/2008	1,390.33	1.00	-0.16	-1.04	-0.75
SP500	5/19/2008	1,426.63	1.00	-0.93	-2.52	-2.26
SP500	7/21/2008	1,260.00	3.00	1.35	1.76	-0.59
SP500	7/22/2008	1,277.00	2.00	0.41	-1.92	-1.51
SP500	10/31/2008	968.75	1.00	-0.25	3.82	-1.65
SP500	11/3/2008	966.30	2.00	4.08	-1.40	-6.36
SP500	11/4/2008	1,005.75	1.00	-5.27	-10.03	-7.43
SP500	11/5/2008	952.77	1.00	-5.03	-2.29	-3.52
SP500	11/26/2008	887.68	2.00	0.96	-8.05	-4.38
SP500	11/28/2008	896.24	1.00	-8.93	-5.29	-2.85
SP500	12/19/2008	887.88	1.00	-1.83	-2.78	-2.22
SP500	12/22/2008	871.63	1.00	-0.97	-0.40	0.13
SP500	1/27/2009	845.71	2.00	3.36	-0.07	-2.34
SP500	3/12/2009	750.74	0.00	0.77	0.42	3.65
SP500	6/29/2009	927.23	1.00	-0.85	-0.42	-3.32
SP500	9/10/2009	1,044.14	1.00	-0.14	0.50	0.81
SP500	10/9/2009	1,071.49	0.00	0.00	0.00	0.00

Lastly, over the past week, the VIX has moved from trading well above it's 10MA to now trading below it's 10MA by 10 percent or more. There have been 124 cases in the past decade where th VIX has closed below it's 10MA by 10% or more. In 102 cases (or 82%), the S&P 500 was trading lower within 3 days.

These studies argue for a close lower than 1071 by Wednesday.

What typically happens when the VIX trades completely outside of it's bollinger bands?

On Friday, the VIX closed above it's upper bollinger bands (20,2) for the second consecutive day. In fact, on Friday, the VIX painted a black candle completely outside of it's band. Looking back over the past decade for similar closes, we find 23 occurrences where the VIX close was lower than it's open and the VIX low as above it's upper bollinger bands. In 20 of those cases 87%), the S&P 500 was trading higher within 3 days.

Ticker	Date/Time	Close	VIX	3Day+	%Chg N1	%Chg N2	%Chg N3
SP500	11/19/2003	1,042.44	18.65	3.00	-0.84	-0.69	0.92
SP500	5/3/2004	1,117.49	16.61	1.00	0.18	0.36	-0.31
SP500	1/4/2005	1,188.05	13.93	0.00	-0.36	-0.01	-0.16
SP500	3/23/2005	1,172.53	13.88	2.00	-0.09	0.15	-0.61
SP500	4/18/2005	1,145.98	16.41	1.00	0.59	-0.74	1.22
SP500	5/16/2005	1,165.69	15.67	1.00	0.70	1.70	2.18
SP500	7/7/2005	1,197.87	12.48	1.00	1.17	1.80	2.03
SP500	1/17/2006	1,283.03	11.87	2.00	-0.40	0.16	-1.68
SP500	1/23/2006	1,263.82	13.58	1.00	0.24	0.07	0.79
SP500	4/10/2006	1,296.62	12.04	0.00	-0.78	-0.66	-0.58
SP500	5/24/2006	1,258.57	17.13	1.00	1.14	1.72	0.10
SP500	7/17/2006	1,234.49	17.75	1.00	0.19	2.05	1.19
SP500	12/8/2006	1,409.84	11.91	1.00	0.23	0.12	0.24
SP500	8/1/2007	1,465.81	23.26	1.00	0.44	-2.23	0.13
SP500	8/16/2007	1,411.27	30.44	1.00	2.46	2.43	2.54
SP500	10/22/2007	1,506.33	21.38	1.00	0.88	0.63	0.54
SP500	11/8/2007	1,474.77	25.32	3.00	-1.43	-2.41	0.43
SP500	1/18/2008	1,325.19	26.27	2.00	-1.11	1.01	2.03
SP500	3/17/2008	1,276.60	31.10	1.00	4.24	1.71	4.14
SP500	6/9/2008	1,361.76	20.78	0.00	-0.24	-1.93	-1.61
SP500	9/10/2008	1,232.04	23.80	1.00	1.38	1.60	-3.19
SP500	10/16/2008	946.43	66.51	2.00	-0.62	4.12	0.91
SP500	9/2/2009	994.75	28.41	1.00	0.85	2.18	3.08
SP500	10/2/2009	1,025.21	27.98	0.00	0.00	0.00	0.00

RSI(2) and VIX

Interesting day. We had two high probability buys triggered today to add the slew of buys from yesterday. Taken together these two signals, the S&P 500 RSI(2) closing below 2 and the VIX closing above it's bollinger bands for the second consecutive day, shows some very favorable odds. This has only occurred 8 times. While not statistically significant, each time marked a short and intermediate term bottom. The table below show that in every case, the market was up within 3 days. Notable as well, the market was up 20 trading days later in 7 out of the 8 cases.

(Note: column '3Day+' displays the number of days it took the S&P to close higher within the next 3 days. a value of 0 indicates the market did not close lower within 3 days)

Ticker	Date/Time	Close	3Day+	%Chg N1	%Chg N2	%Chg N3	%Chg N20
SPX	8/6/1990	334.43	1.00	0.12	1.17	1.65	-3.39
SPX	1/8/1991	314.90	3.00	-1.08	-0.12	0.10	11.55
SPX	9/7/2001	1,085.78	1.00	0.62	-4.33	-4.88	1.07
SPX	4/29/2002	1,065.45	1.00	1.08	1.97	1.79	0.85
SPX	7/23/2002	797.70	1.00	5.73	5.14	6.91	17.52
SPX	3/11/2004	1,106.78	1.00	1.25	-0.21	0.35	2.94
SPX	8/6/2004	1,063.97	1.00	0.12	1.42	1.11	4.67
SPX	6/13/2006	1,223.69	1.00	0.52	2.65	2.28	2.85
SPX	9/2/2009	994.75	0.00	0.00	0.00	0.00	0.00

When we relax the RSI(2) criteria to look for cases where RSI(2) closed below 10 while VIX closed above it's upper BB(20,2) bands for two consecutive days, we get 36 previous occurrences. In these cases, the market was up 88.9% of the times 3 days later. This is about the same odds had we used the RSI(2) alone. However, where we see better odds by combining these two non-related triggers is looking out 20 days. There, we see that the S&P has historically been up 81% of the time 20 trading days later vs 73% odds with the RSI(2) alone.

Ticker	Date/Time	Close	3Day+	%Chg N1	%Chg N2	%Chg N3	%Chg N20
SPX	8/6/1990	334.43	1.00	0.12	1.17	1.65	-3.39
SPX	1/8/1991	314.90	3.00	-1.08	-0.12	0.10	11.55
SPX	6/18/1992	400.96	1.00	0.68	0.61	0.77	3.66
SPX	10/2/1992	410.47	0.00	-0.71	-0.80	-1.52	2.00
SPX	1/5/1993	434.34	1.00	0.04	-0.83	-1.22	1.89
SPX	2/17/1993	433.30	2.00	-0.32	0.21	0.45	3.46
SPX	9/8/1993	456.65	1.00	0.19	1.11	1.18	0.90
SPX	9/21/1993	452.95	1.00	0.72	1.06	1.03	2.93
SPX	11/4/1993	457.49	1.00	0.45	0.59	0.62	1.62
SPX	3/31/1994	445.77	2.00	-1.54	0.57	0.51	1.63
SPX	6/21/1994	451.34	1.00	0.39	-0.38	-1.89	0.06
SPX	1/10/1996	598.48	1.00	0.70	0.56	0.22	8.60
SPX	7/16/1996	628.37	1.00	0.91	2.42	1.65	5.07
SPX	12/16/1996	720.98	1.00	0.70	1.46	3.44	6.41
SPX	7/24/1998	1,140.80	1.00	0.57	-0.93	-1.37	-5.22
SPX	8/28/1998	1,027.14	0.00	-6.80	-3.20	-3.57	2.10
SPX	9/24/1999	1,277.36	1.00	0.47	0.38	-0.70	1.90
SPX	10/10/2000	1,387.02	0.00	-1.62	-4.13	-0.93	3.23
SPX	2/21/2001	1,255.27	3.00	-0.20	-0.75	0.99	-10.61
SPX	9/7/2001	1,085.78	1.00	0.62	-4.33	-4.88	1.07
SPX	4/29/2002	1,065.45	1.00	1.08	1.97	1.79	0.85
SPX	6/4/2002	1,040.69	1.00	0.88	-1.11	-1.26	-8.90
SPX	7/16/2002	900.94	1.00	0.57	-2.15	-5.90	-1.86
SPX	7/23/2002	797.70	1.00	5.73	5.14	6.91	17.52
SPX	1/27/2003	847.48	1.00	1.31	1.99	-0.34	-1.05
SPX	11/18/2003	1,034.15	1.00	0.80	-0.05	0.11	4.09
SPX	3/11/2004	1,106.78	1.00	1.25	-0.21	0.35	2.94
SPX	5/10/2004	1,087.12	1.00	0.77	0.93	0.86	5.06
SPX	8/6/2004	1,063.97	1.00	0.12	1.42	1.11	4.67
SPX	10/6/2005	1,191.49	1.00	0.37	-0.35	-0.56	2.39
SPX	5/18/2006	1,261.81	1.00	0.41	0.02	-0.41	-0.81
SPX	6/13/2006	1,223.69	1.00	0.52	2.65	2.28	2.85
SPX	3/5/2007	1,374.12	1.00	1.55	1.30	2.02	3.67
SPX	6/7/2007	1,490.72	1.00	1.14	1.23	0.15	2.66
SPX	7/27/2007	1,458.95	1.00	1.03	-0.25	0.47	1.40
SPX	10/7/2008	996.23	0.00	-1.13	-8.66	-9.74	0.96
SPX	9/2/2009	994.75	0.00	0.00	0.00	0.00	0.00

Pretty good odds when compared to the the odds of the S&P closing higher on any given day under the same exit conditions over the same data sample period - those odds are 69.6% for a higher close WITHIN 3 days and 59.92% for a higher close 20 days later.

These studies combined with yesterday's suggest the market has a high probability of closing higher within the next few days and additionally suggests that the market may remain on firm ground looking further out, 1 month later.

If the market continues lower over the next few days despite these occurrences, bears will have made their mark quite strongly.