McClellan Chart In Focus: VIX Is Not Confirming Higher Prices – By Tom McClellan


Chart In FocusThe major averages are ignoring missile strikes, oil market turmoil, and excessively bullish sentiment, keeping prices marching higher in 2020.  But we have a major bearish divergence now in the VIX Index, which is NOT making lower lows to confirm those higher price highs.

The VIX Index made its lowest closing low for this price uptrend back on Nov. 26, at 11.54.  Since then, it has been making a succession of higher lows, even though prices have continued higher.  That sort of bearish divergence has meant a meaningful top was looming, based on past episodes.  In my long look back at this relationship, I find that the VIX does not always give us a divergence like this at every top where we might like to get such a message.  But when it does show us a divergence like this, it is worth listening to.  And typically the time span of the divergences that matter is only a few weeks.  Once we get a big VIX spike up toward 20 or higher, the clock gets reset in terms of tabulating a new divergence.

Even though the VIX is showing a slight upward cant, it has still remained pretty quiet.  This next chart shows a 50-day standard deviation of closing VIX values:

VIX Index standard deviation

The generally quiet VIX Index readings over the past 50 trading days has produced a very low reading for this indicator.  Such readings are reliably associated with meaningful price tops.

The problem is that this is a condition, and not a “signal”.  The low readings can continue for a long time before they finally are allowed to matter.  So a condition like this helps to inform us about what is coming, but it does not say when the final price top moment will get here.  Having said that, the moment when this VIX standard deviation starts to rise rapidly is a good tell that the price top is already in.  But that tell usually comes via a big spike up in the VIX Index itself.

Tom McClellan
Editor, The McClellan Market Report

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About the author

Sherman and Marian's son Tom McClellan has done extensive analytical spreadsheet development for the stock and commodities markets, including the synthesizing of the four-year Presidential Cycle Pattern. He has fine tuned the rules for interrelationships between financial markets to provide leading indications for important market and economic data. Tom is a graduate of the U.S. Military Academy at West Point where he studied aerospace engineering, and he served as an Army helicopter pilot for 11 years. He began his own study of market technical analysis while still in the Army, and discovered ways to expand the use of his parents' indicators to forecast future market turning points. Tom views the movements of prices in the financial market through the eyes of an engineer, which allows him to focus on what the data really say rather than interpreting events according to the same "conventional wisdom" used by other analysts. In 1993, he left the Army to join his father in pursuing a new career doing this type of analysis. Tom and Sherman spent the next 2 years refining their analysis techniques and laying groundwork. In April 1995 they launched their newsletter, The McClellan Market Report, an 8 page report covering the stock, bond, and gold markets, which is published twice a month. They utilize the unique indicators they have developed to present their view of the market's structure as well as their forecasts for future trend direction and the timing of turning points. A Daily Edition was added in February 1998 to give subscribers daily updates on their indicators and also provide market position indications for stocks, bonds and gold. Their subscribers range from individual investors to professional fund managers. Tom serves as editor of both publications, and runs the newsletter business from its location in Lakewood, WA.