What Divergence Tells Us

Traders are both gaining confidence and losing confidence at the same time. John Jagerson explains.

   

Video Transcript

The CBOE Volatility Index (VIX) has been dropping the past couple of days, which is inverse to the S&P 500, as expected. The trend of the S&P is actually quite positive and yet the lows correspond to the highs quite accurately, as we would expect. However, what’s been happening is that the VIX is running along the bottom of its support line, but it’s also trending up.

That’s something I look for that’s very specific. In other words, if the support line for the VIX is trending in the same direction as the support line for the S&P 500, that, in and of itself, is a bit unusual and it indicates that every time investors get more confident, they’re actually less confident than the spike before.

So, over the last several weeks, we have this situation where traders have been getting a little bit less and less confident every time the market begins to rally. We saw something akin to this back in August and September. The support line for the VIX was kind of trending up a little bit during a period of time where the trendline was very positive.

I show you on the chart in the video what we would have liked to have seen the market do.

However, when you get a divergence like we’re seeing now, does that stand out to us to say is the market guaranteed to go down? No, probably not, but it does create a really tough resistance for the market to break through. This is a really good time for us to be thinking of this because the market has been running up a little bit.

Investor Place advisors John Jagerson and S. Wade Hansen are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news.  Get in on the next trade and get 1 free month today by clicking here.


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