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So what is my point in all of this: the VIX is not the FEAR GAUGE; it is the insurance gauge. And smart money buys insurance when it gets scared. I am going to show you, just like I tell Cramer how to spot when the market might drop and when the market is at its bottoms. The key to the enter system is the VIX. With what I told you above in mind, let’s think about how VIX should act. Generally speaking when the market is up, the VIX should be falling because big investors feel confident about the market. When the market is down the VIX should be rallying because big money is buying protection. ‘Big money’ is just like retail traders; they see what is in front of them and hedge or skip hedging. The big difference between retail and institutional money is that institutional money tends to be out front of tops and bottoms. Smart money starts to hedge BEFORE things turn either way. Let’s take a look at a chart of the VIX and the SPX side by side. Notice that when the SPX is down VIX tends to be up and when the SPX is up the VIX is down. In the above chart I circled the SPX rally of April 2019 and matching VIX decline. Now let’s look closer notice the VIX at the END of the SPX rally. What is going on? At the end of the rally in SPX the VIX starts to creep higher. This is a sign that the smart money is starting to buy put options on the SPX. Why would smart money do that? The answer is that the smart money is starting to see a top and is beginning to position themselves for a nice drop in the SPX. Are they right? Take a look at what happened next: As you can see the VIX popped and the SPX tanked falling from near all-time highs to below 2850 in a matter of days. But it doesn’t end there. The market has a small dead cat bound before it fell all the way below 2800. But then something funny happened, the VIX stopped exploding. Looking closer look at what happened at the absolute near term bottom in the SPX: As the SPX was bottoming the VIX was failing to rally. On a drop of about 60 points over 2 days the VIX produced 2 red candles and failed to get anywhere near a recent high. The VIX at the bottom essentially did nothing, shrugging off the heavy selling. Why? The answer is that smart money was selling the puts they bought in April BACK TO THE MARKET!! When the smart money is selling puts to the market place on sell offs, that is a clear sign that they believe the selling is over. Lo and behold, what followed this SPX and VIX price action. We went STRAIGHT UP: The smart money was telling the world the selloff was over and they were getting ready to go long. Shockingly (not really) smart money was right and the market rallied HARD. Over 100 points in 3 days. So what does this mean to you? This means you need to learn how the VIX and SPX relate to each other and start noticing the signs of a rally ending or a sell off waning. The system of seeing the VIX and the SPX break their usual relationship has held for years. I successfully called bottoms in the SPX in 2011, 2015, 2016, 2018 and 2019. I did the same on rallies. If you don’t believe me, here is a video of my research provided to Cramer in October of 2018, used on Mad Money, saying the pain is not over for SPX on a day it rallied 60 points….entirely using the VIX and SPX relationship. So how can you learn to do this? It’s actually pretty simple, add the VIX to your watch list. Watch how it moves with the SPX. When the market is selling off make note of when the VIX is not exploding higher. Moreover, make not when it is flat or barely up on the down days during a sell off. When you see this make note. Count how many days it takes for the market to get its wings. Generally speaking it will be fewer than 3 days. Alternatively when the market is off to the races keep watching that VIX. When the market is up and the VIX is up more than 2 days in a row count how many days it takes the market to have some selling. Again it will be fewer than 2 or 3 days. As you become more and more familiar with the price action of VIX and SPX you will begin to feel comfortable taking small shots and pivots in the market. With time as you become more and more familiar with these pivots, these are the times to lighten the load on holdings at tops and/or set up hedges. At bottoms these are the times to employ cash. Is it fooling proof, no? But it tends to works. When this system fails it tends to be related to ‘news bombs.’ Talks fail, or a deal is reached on the macro level that surprises everyone. There is not a lot of ways of spotting these. But in a normal market this system of looking at how the VIX and SPX correlate works close to 100% of the time. THE SPECIAL OFFER Want to learn more about the VIX, want to know more about how to use this system? Take our VIX primer class for just 97 bucks. In addition I’ll give you a free month of access to my private chat where you will get to hear me analyze the market on a daily bases. This package is worth 500.00, but yours for a paltry 97.00. If you hate it , I’ll give you your money back. OptionPit.com Services Offered: Trading Education, Training, Trade Room, Newsletters Markets Covered: Stocks, Options Mark Sebastian is a former member of both the Chicago Board Options Exchange and the American Stock Exchange. The Author of the popular trading manual “The Option Traders Hedge fund.” He is a frequent guest on CNBC, Fox Business News, Bloomberg, First Business News.