Yo Pit Crazies,

The twists and turns continue to come out of Europe, with news of missiles hitting Poland breaking on Tuesday.

It was enough to erase some pretty fair market gains.

After the producer price index (PPI) number, VIX was heading lower and the SPDR S&P 500 Trust ETF (Ticker: SPY) was ready to tickle 410

Then it all went bad.

Most of the day until 1 p.m. VIX could not drop – and that was a problem.

It’s not likely VIX was predicting a missile attack, but the near 2% morning rally ran out of gas.

Vol Man will explain it.

VIX and SPY Generally Move in Opposite Directions

When SPY rallied Tuesday morning, the VIX never held on to red.

As you can see from the graph above, volatility was dead flat until the Poland missile attack.

At that point, the normal inverse relationship took hold and VIX jumped and SPY dove.

Once the missile attack heat cooled somewhat, VIX cash crashed as SPY rallied back.

VIX still closed the day up with an up day in SPY.  That is not a bullish close for SPY.  The reason is, there were no willing sellers of options on balance.

Bull markets bring willing options sellers. Bear markets bring aggressive option buyers.

The steep SPY rallies are not confidence builders and it is possible that the big gains we have seen evaporate.

I would like to see the VIX drop for real to keep the SPY rally intact. 

The Rundown

Pro Chat Room

Props for Mark!

To Your Trading Success,

AG