Latest / The Day Trading Podcast with Fexingo: Active Trading, Charts, and Short-Term Market Strategy / How Day Traders Read the Post-Rally Calm
Transcript
- Lucas: So the market just had one of those weeks where everything went up and the VIX went down hard. The S&P 500 is sitting at 7,737 after a five-day gain of nearly six percent, the Nasdaq is up almost nine percent, and the VIX has collapsed to 16.50. That is a twenty percent drop in the fear gauge in just five sessions. Luna: And that calm is exactly what makes me nervous. It's like the market is exhaling a little too loudly. Lucas: Right, and you've got Michael Burry out there saying we're near a major top and maybe a 1987-style fall. Now, Burry has called tops before and been early. But the setup is worth paying attention to. When the VIX drops that fast while the index is making new highs, the tape can feel easy. And that's when day traders tend to get sloppy. Luna: So today I want to unpack this specific moment. What does a VIX at 16.50 actually tell a day trader after a rally like this? Is it a green light to keep buying dips, or is it a warning that the easy money has been made? Lucas: Let's start with the basic read. A VIX below 17 is usually associated with complacency. The market is pricing in very little near-term risk. And when you combine that with the VIX futures curve in contango, which it is right now, the market is saying the next thirty days are going to be smooth sailing. Luna: But you and I both know that smooth sailing is often when the rogue wave hits. Lucas: Exactly. So as a day trader, you can't just fade the rally because the VIX is low. You need to look for structure. The key is whether the low VIX is confirming a healthy trend or masking a top. And one of the best ways to check that is to look at the relationship between the VIX and the price action on the S&P 500. Luna: And that's where the divergence comes in. When price makes a new high but the VIX doesn't make a corresponding low, that's a warning. But here, the VIX actually broke down with price, so it's confirming the move. Lucas: Right. So on the surface, the rally is healthy. But there's a nuance. The VIX at 16.50 is still above the lows we saw earlier in the year. And the VVIX, the volatility of the VIX, is at 92.57. That's down fifteen percent this week, but it's still elevated historically. That tells me options market makers are still nervous about a VIX spike, even as it grinds lower. Luna: So the VVIX is like the market's anxiety about its own anxiety. When that stays high while the VIX drops, it's a bit of a contradiction. Lucas: Precisely. And that's where the day trader edge lies. You want to trade the market that exists, not the one you wish for. Today, the trend is up, momentum is strong, and the VIX is low. That's a textbook environment for buying the dip on strong names, especially in tech. Luna: But you have to respect the risk. Because if that VIX spikes back to 18 or 20, the market can gap against you in a hurry. Lucas: That's why position sizing is critical. Let me give you a practical framework. When the VIX is below 17 and the trend is up, you can size positions at your normal risk level, maybe even a bit larger if you're trading the open and the momentum is with you. But the moment the VIX starts to turn higher intraday, or you see a reversal candle on the five-minute chart, you cut risk in half. Luna: So it's not about predicting a top. It's about reacting to the signals that a top might be forming. Lucas: Exactly. And speaking of signals, let's talk about what's not in the price. Burry's warning is one thing, but there's also a real flow event happening. Jeff Bezos just filed to sell four billion dollars in Amazon stock. That's a massive supply overhang, and it's already pushing shares lower. Luna: And when a mega-cap founder starts selling, it can be a sentiment drag on the whole market, especially in tech. Lucas: Right. So you have this interesting mix: the index is making new highs, the VIX is low, but some of the smartest money is de-risking. Burry is shorting, Bezos is selling. That's a recipe for a choppy tape, even if the trend stays up. Luna: So if I'm a day trader listening, what's the one thing I should do tomorrow morning? Or tonight, I guess, since it's after hours. Lucas: The first thing is to not chase the open. When the VIX is this low and we've had a huge rally, the open can be a trap. The market can gap up, then fade, then find support, then rally again. You want to wait for the first fifteen or thirty minutes to define a range, then trade the breaks with discipline. Luna: And watch the VIX futures. If you see the VIX start to tick up while the S&P is still climbing, that divergence is your early warning. Lucas: Yes. That's a signal I would trade in a heartbeat. A rising VIX on a rising market often precedes a short-term pullback. And that's where you can make money on the short side, or at least avoid getting run over. Luna: Before we go deeper into the VIX futures curve, I want to touch on something. We've been having these conversations every day, and a lot of you have asked how you can support the show. If you've found these episodes helpful, and today's breakdown of the VIX calm gave you a new way to think about the market, the easiest way to say thanks is to buy us a coffee. Lucas: Yeah, it genuinely keeps the podcast ad-free and helps us keep doing this deep-dive stuff every day. The link is buy me a coffee dot com slash fexingo. No pressure, but if today's episode was worth a coffee to you, that's where you can find it. Luna: And we are back to the curve. So what does the VIX futures curve look like right now, and how should a day trader use it? Lucas: So the curve is in contango, which means the front month is lower than the back months. That's the normal state. But the slope matters. When the curve is steep, it means the market expects volatility to rise in the future. When it's flat or inverted, that's when you get worried. Luna: And right now, with the VIX at 16.50, the front month is probably around that level, but the second month might be at 18 or 19. That's a moderate slope, not extreme. Lucas: Right. So the market is saying, things are calm now, but they won't stay calm forever. That's actually a healthy signal. It means the market isn't in full complacency mode. If the curve were inverted, that would be a red flag for a near-term crisis. Luna: So a moderate contango is actually a green light for day traders to keep trading the trend, but with an eye on the horizon. Lucas: Exactly. And that's the nuance. You don't have to be bearish just because Burry is. You just have to respect the risk. The VIX is a tool, not an oracle. It tells you the market's expectation of risk, but it can be wrong. That's why you combine it with price action and volume. Luna: And you mentioned volume. What should we be looking for in terms of volume to confirm this rally is real? Lucas: The rally has been on above-average volume, which is a good sign. If we start to see new highs on declining volume, that's a warning. But right now, the volume is confirming. So the trend is probably intact, at least in the short term. Luna: So if I'm a day trader, I should be looking to buy dips in the morning, but I should have a hard stop if the VIX starts to climb. Lucas: That's a solid plan. And one more thing: pay attention to the VVIX. If that starts to climb even as the VIX stays flat, that's a sign that options market makers are getting nervous, and that can lead to faster moves in the underlying. So you might want to tighten your stops. Luna: So we have a market that looks calm on the surface, but underneath, there are these undercurrents of nervousness. Burry, Bezos, the VVIX. It's a bit of a paradox. Lucas: It is. And that's what makes day trading interesting. You're not trading the headlines; you're trading the reaction to the headlines. And right now, the reaction is a market that's climbing a wall of worry, but doing it steadily. Luna: So the bottom line for today's episode: low VIX after a big rally is a green light for trend-following, but you have to be prepared for the reversal. Use the VIX and VVIX as your guide, watch for divergences, and size your positions accordingly. Lucas: And remember, a top is a process, not a single day. Burry might be right eventually, but being right early is the same as being wrong for a day trader. So trade what you see, not what you fear. Luna: That's a good note to end on. We'll be back tomorrow with another signal breakdown. Until then, keep your stops tight and your mind open.