Market pull back, can you take it seriously ?

TCCO

Yesterday’s market action was tepid. We’re still treading water on extremely light volume with little to see. Most of the action has been relegated to commodity prices.

However, today’s jobs report sent the market higher with the SPY up solidly to start the day and the VIX collapsing. Puts me in a great spot going into the weekend on many of my trades. I’m curious if that starts to translate to wage inflation as hours worked ticks up and higher-end wages started to as well. Maybe the economy is doing better than we thought. Sets up Q4 for a lot of earnings beats.

But, I see a problem with the market. Despite the VIX spiking, traders and investors still hold very little protection. It’s sort of baffling given how paltry the outlooks are for next year.

VIX hourly chart

Before I tell you my thoughts…where do you think the VIX will mostly likely find support? There’s a few clues.

  1. Gap fill
  2. Gravitational line (AKA 200-period moving average on the hourly chart)
  3. Lots of swing points right around that area

$13 sound good for everyone?

We are still seeing elevated levels on the VVIX.

VVIX daily chart

Think about the two clues we have here.

  1. No one is buying protection according to the VIX
  2. Traders are beeing the VIX will move sharply

That means that VIX option traders are betting that people will panic and buy options on the next downturn. It happened already and it will happen again.

And I will repeat this until I’m blue in the face…going long the VIX at levels below $13 and especially $12….after the VIX has already been down there for a few weeks…has a VERY high probability of success.

With the trade setup correctly from that spot, I cannot think of any other trade for retail investors that exists (other than playing the VIX collapsing after a major run) that has a higher probability.