Wild and Unexpected

Last week followed the classic 5 day pullback script, with a V thrust with back to back huge up days to make back most of the losses from the pullback, only to see it crumble since NFPs.  Today we have another giant fake out, something that completely surprised me, on NO news, gapping up huge, extending those gains, and then dumping big time since NY lunch time.  Rarely have we seen such a big gap up extend its gains in the open, and then completely fall apart.  The only time I can remember such an intraday turnaround that is somewhat similar, with a smaller gap up, is on December 11, at SPX 2055, before we went down to SPX 1972 a few days later.

And the scary thing is you can't even blame oil, because crude oil made a bottom overnight, and has been rallying from those levels, despite an S&P that is falling apart.

This is a different animal.  I haven't seen this kind of wild volatility near all time highs since 2000.  2007 wasn't even close to being this wild.  There is a good reason that VIX futures are well above 20 now, and even after back to back rally days, refuse to stay below 18.  What I suspected from the suspiciously high VIX levels after 2 monster up days in December has proven to be true.  We are now in a higher volatility regime.

VIX futures are trading higher now than a week ago when the SPX was at 1992, even though SPX is trading at 2010 at the moment.  So you have a market that is higher than last week's lows, but the VIX has broken out to new highs anyway.

The VIX buyers have had sand kicked in their face for so long, this is a totally new thing for them.  The volatility buyers are no longer getting bullied and are the ones doing the bullying.

I am still uncomfortable shorting this market, but I do believe we will go lower in the coming days, perhaps we'll get a bad news bottom, like we did with the ruble crisis in December.  A bad news bottom near SPX 1960 is buyable.  This market is badly in need of a big flush out to purge all the early dip buyers out of the way.  Otherwise, you have a low probability buy setup that can reverse just like today.  Waiting for a big flush out to buy, otherwise just watching with hands off the buy button.