Hey Market Pilots,
I love divergences. Sometimes they are positive, sometimes they are negative. I look for divergences with my Moxie Indicator to help me get in and out of a trade, and I use divergences between other metrics to help determine overall market sentiment. But the major divergence I am looking at right now may be indicating that the market’s push higher this week could be a trap and there might be a sinkhole forming right underneath.
In this case, I am referencing volatility to tell me the truth about the market. I say this because on the surface the market looks great as it has had a solid few days climbing higher and maintaining price over nearly all moving averages. While they say price is king, sometimes I find this to be a facade, distracting you with its green bars and upward slope, only to be built on the rockiest of foundations.
What is really going on behind price and how can I say that I believe a sinkhole is forming when all visible indications say that things are fine? This is where I bring in volatility with the VIX or UVXY. These are what many refer to as the ‘fear index’ and can be a reflection of the fear in the market. So what’s it mean when these fear indices start to inch upward while the market also inches upward? That the market may be putting up new wallpaper over crumbling walls.
Above is a screen shot of the hourly time frame for the SPY, VIX, UVXY. Normally, when the market goes higher, the volatility goes down. So when I notice that the volatility is going up along with price, my antenna starts to perk up and I dig deeper. I did some looking around the market with my scans and general watchlists and I didn’t see anything appetizing to buy long. In fact it was a mixed bag of names that had already moved so well they needed a pullback, and names that were in various forms of short term down trends.
Putting this together, I find a market that I absolutely do not want to go long in, and a market that I am starting to nibble on with the short side through buying volatility. This divergence is speaking to me and I want to make sure I am hearing its whispers, or maybe shouts when we view it in hindsight, so I have captured my profits on the long side and now I am freely waiting for a clearer picture once things start to happen.
Over and Out,
Your Profit Pilot
