Don't Ignore This Chart!

A Short-term Disconnect between VIX and SPY - Watch the Pennant


There is another disconnect working between the VIX and SPY. The S&P 500 SPDR (SPY) opened weak with a dip below 265, but the S&P 500 Volatility Index ($VIX) also declined. This is an interesting dynamic because the VIX usually moves opposite of SPY. I am also intrigued that SPY opened weak and quickly rebounded. 

Note that this disconnect could also be due to the options expiration for VIX  contracts because many expire today (14-February). See the CBOE website for more details. 

The current correction started when SPY and the VIX were moving in the same direction. As noted in Art's Charts on January 30th (members only), both the VIX and the S&P 500 rose from mid-January to late January and this disconnect warranted caution at the time.  

While I still think the current correction has yet to fully run its course, we could still see a counter-trend bounce and today's VIX action warrants a close watch on the pennant taking shape in SPY.

Keep in mind that this is very short-term analysis that is subject to change quite quickly. 

The chart below shows SPY surging from 253 to 267 and then stalling the last day or so with a pennant. A break to the upside (>267) would be bullish and argue for a continuation of the advance from Friday afternoon to Monday. A break to the downside (<264) would argue for a continuation of the February downtrend. 

The indicator window shows the VIX opening lower and testing the 20 area. A move below 20 would be significant because it would suggest that fear is subsiding and this could be the catalyst for further upside in SPY. 

Plan Your Trade and Trade Your Plan.

- Arthur Hill, CMT

Senior Technical Analyst,

Book: Define the Trend and Trade the Trend
Twitter: Follow @ArthurHill

Arthur Hill
About the author: , CMT, is the Chief Technical Strategist at Focusing predominantly on US equities and ETFs, his systematic approach of identifying trend, finding signals within the trend, and setting key price levels has made him an esteemed market technician. Arthur has written articles for numerous financial publications including Barrons and Stocks & Commodities Magazine. In addition to his Chartered Market Technician (CMT) designation, he holds an MBA from the Cass Business School at City University in London. Learn More
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