It all started with a test of the 50 day moving average. This was the first test since March 29. We violated it and then closed below it. The next day the market rallied above it to only close below it for a second time. I thought this would make the longs a little scared. When the S&P is near the 50 day moving average I make sure that I am aware of what the VIX is doing. The VIX tells me if there is any panic in the market. Traders go to the options market to hedge their positions, so when this happens the VIX rallies. The VIX was staying weak signaling to me that there was little or no concern about this violation of the 50 day moving average in S&P. This told me not to be a seller but to be looking for areas to buy. I wanted to be a buyer but I have been watching an upside down head and shoulders forming for about two, three weeks and I knew that we were close to the trend channel which would form the second shoulder. Knowing this I waited for the market to test the the trend channel to confirm the upside down head and shoulders. The futures failed to test this trend channel but the cash tested it and held. From this point on I knew to be a buyer. First the VIX is not rallying but making lows for the month and we had confirmation that the upside down head and shoulders was now intact. The bulls did not get shaken out by the violation of the 50 day moving average, they only added to their positions and then got confirmation in the SPX by holding the trend channel. The VIX kept me away from being an aggressive seller like I normally would be with a violation of the 50 day moving average, but turned me into a patient buyer and then and aggressive buyer once I got confirmation from S&P cash chart showing me that the trend channel held.
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| S&P Cash Chart |
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| E-mini S&P Chart |
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| VIX Chart |
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