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2007 Analog And Skew Divergence

  • Written by Syndicated Publisher No Comments Comments
    August 2, 2011

    Below are updates to both the 2007 topping pattern as compared to the current market and the skew vix divergence. As stated countless times I believe markets at inflection points are more a function of psychology and less technicals and or macro data. Another countless reference is the following from a novel about Jesse Livermore.

    “He observed that human emotions collectively had major impacts on the movement of stock prices and Markets in general, ultimately creating patterns that kept repeating.”

    2007 Comparison

    The candles have been eerily similar in both charts since Point F was established. If this analog continues to play out the next few days should be volatile but somewhat range bound.  Considering the next major data point is Friday’s NFP report this would make some sense. Additionally having the debt ceiling “nonsense (only word to describe it)” behind us should smooth out some volatility.

    Skew Vix Divergence

    I don’t fully trade off this signal yet but find its correlation with the SPX too strong to ignore. It is currently at two prior lows which has signaled bounces in the SPX but on a longer time frame this value is of no significance so personally I won’t be rushing out to cover shorts or go long. At least not on Tuesday.

    Skew Vix Divergence Historical Chart

    Notice how low the divergence can in fact go. An example would be the vix spiking as markets sell off all while the skew falls.

    Divergence 2007 VS 2011

    Another correlation I find interesting is that of the skew vix divergence of the 2007 topping pattern and the current market. I created this chart under the belief that this divergence captures sentiment better than the vix alone.  The similarities are unquestionable which one could argue further supports that current market action is driven by psychology. It’s important to understand so you won’t be shaken out of a position that is “due for a technical bounce.” Remember stocks can do whatever they want. It’s a free market (sarcasm, couldn’t resist).

    Read More And Shared From (under licence)

    2007 Analog And Skew Divergence | Macro Story.

    Images: Flickr (licence details)