In Alternative View I highlighted the $VIX as a key chart to watch in 2021 for it showed longer term structures that suggest a major volatility event is to come at some point.
One of the mysteries has been why the $VIX still hasn’t filled its February 2020 gap despite ongoing new market highs, record liquidity injections and an economy that is showing not only signs of a solid recovery but also now potential for back to back growth years into 2022 not seen in 55 years.

Now with nearly 2 months into the year let’s have an updated look at the $VIX.

First off the big structure with the potential cup and handle pattern originally outlined remains full intact:

But now with a couple of volatility events into the year we can also note a forming compression pattern, lower highs and lower lows. Look no further then to 2017 to see that these type of structures can take many months to form and to ultimately break out higher triggered by some sort of event.

Looking at the daily chart we get a cleaner picture:

The unfilled February 2020 gap remains glaringly untouched. And it is historically very odd frankly. $VIX has had every excuse in the book to fill this gap by now. Fear you say? What fear?

$CPCE put/call ratio

¯\_(ツ)_/¯ pic.twitter.com/XowqrlDq59

— Sven Henrich (@NorthmanTrader) February 25, 2021

There’s no fear in this market.

Rather what we do see is the $VIX systematically moving to fill up gaps as well down gaps. Get to many unfilled gaps to the downside and they get filled, get too many down gaps and they get filled. A permanent ping pong game.

Indeed this week’s downdraft in markets stopped as $VIX filled another outstanding gap above:

This gap fill then served as a pivot point for equities to rally higher (see also Technical Pivots). Now we have 2 lower open gaps again above the February 2020 gap suggesting these gaps will get filled at some point in the next month or two. Yet the early February gap still remains open suggesting $VIX also has an appointment with this gap still.

Point being is volatility remains historically high even with record market highs which is not unlike what we saw during the year 2000 tech bubble.

But there is a notable difference. If you check the yearly $VIX chart versus its yearly 5 EMA we see something completely unprecedented:

Every single year the $VIX drops below the yearly 5EMA. It may stay there for an extended period time and corrections in markets spike it above. To see it remain entirely above the yearly 5 EMA is entirely unprecedented.

What’s that mean? Well, for one, it’s just a recognition that the $VIX is behaving in an unusual way. For market bulls it offers a pathway to suggest that the $VIX will eventually drop below the yearly 5 EMA and thereby the filling of the February 2020 gap is yet to come in 2021. Yet it may also suggest that something is not quite right with the bullish narrative. So far historic valuations, market valuations disconnects from the economy, rising yields and a potential overheating of the economy have not yet mattered.

Complacency continues to dominate in participant behavior, but the larger $VIX structures suggest that this complacency may end up getting eventually replaced by utter market terror.

Unfortunately these $VIX structural charts can’t tell us the day or hour. They merely inform us that something major is in process of building. My best guess? And it’s only a guess, but the 2nd half of 2021 and/or into 2022 could see something major trigger based on these charts. The $VIX target of the larger pattern? I don’t dare mention it again, but I discussed it in the Alternative View.

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