$VIX Chicken or $VIX Egg?

Let’s talk about the $VIX wedge.

Many of us watch the $VIX with some care. After all, studying its chart has often been a good source of intelligence despite what detractors of this behavior continue to tell us (and continue to be wrong about). So what do we have now? We have the mother of all wedges coming, it would seem, to its conclusion. That maybe should scare the living shit out of all of us. It may be a reason why the indexes appear to be hedged to the eyeballs (or perhaps being hedged to the eyeballs is painting the $VIX):


My concern is this: though many of us have been in the practice of observing the $VIX for years, perhaps no one has popularized the big wedges it has formed more than my man Sven. And now everyone is staring at it. And I’m not sure just what that is going to do to it. Will it become a self-fulfilling prophecy? Will we all get so scared looking at it everyday that the whole world liquidates its holdings for fear of the wedge breakout we’re anticipating, which then causes it to erupt? Or, like many chart patterns that are a little too obvious, do we all hedge to the gills and have our hedges get completely stuffed?

I see several possibilities:


  1. We’re fucked (lol, not bears). The wedge breaks out just as it looks like it wants to and we have something tantamount to a crash or at the very least a huge correction (some estimates I’ve seen take the $VIX as high as 140). I like this: the market is extended, blood in the streets and human suffering are enjoyable. I worry though because, honestly, at this point, it feels to me from my vantage point, that it’s now the consensus play. That’s why I decided to write this article as a matter of fact.
  2. We get a breakout, everybody panics, but it surprises to the subdued side. In the immortal paraphrased words of Obi-Wan Kenobi: “It’s not the $VIX spike we’re looking for.” And then, later, just as everyone comes to believe that it’s not spike we’re looking for, we get the spike we were looking for, or
  3. Everyone comes to believe now we get the spike we were looking for (point 2 above) and it surprises with a complete change in the volatility regime that we’ve been in for several years now (note the rising green trend line). Doors 2 & 3 here would suggest some period of correction, door 2 leading to a crash later, door 3 leading to a resumption of the interminable uptrend.
  4. Or, we get that last point now and the volatility regime we’ve been in for years changes sooner rather than later.

Now this has been a completely unhelpful exercise. If you guys thought the market predictions we like to sometimes make in which we end up suggesting “it could go up, or it could go down” were laughably unhelpful, I’ve just suggested four alternatives instead of only two. It’s virtually impossible for me to be wrong here unless the $VIX surprises to the left (which I’ve just cracked a joke about so checkmate).

But really, what can we as intelligent traders do? And as literary men, how can we now incorporate the title that I have given this article? I think we’re in a tough spot. We can either draw whatever most probable outcome we think will emerge from the $VIX and use that as a guide to the market, or we take everything we can think of regarding the market and use that to try to imagine where the $VIX may go.

And this is the thing puzzling me the most at present. While trying to be as objective as I am able to be, I have amassed a reasonable amount of evidence that suggests to me we may not be anywhere too close to anything like a crash, and yet...and yet…the $VIX is telling me to dismiss all of that. And that is putting me in quite a pickle. Do we let the evidence as a whole govern our views on the $VIX or do we let our views on the $VIX govern our views on the whole? At least in the past, “all that evidence” was in agreement with the $VIX, not in contradiction. Leading up to the February 2020 high, for instance, $COPPER down, $OIL down, $10YRYLD down, etc. It was all beautiful.

Given the sum of the evidence, I will rank the four outcomes I have presented above in terms of their probability as best as I can fathom them at present. I think (most likely to least likely): 3, then 2 (but no $VIX 140 there, just a serious correction), then 4 then 1. That’s how I would rank them given the sum of the evidence I am seeing elsewhere.

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