I looked at this theory last month when considering action over the course of several days. At the time I found no evidence to support the bearish case. For testing I looked at a 5-day divergence to measure the return in the VXO and S&P prior to triggering. Tonight I looked at a 1-day divergence.
Not only is there a lack of bearish evidence but these results could be considered borderline bullish. I also looked at more extreme 2% SPX drops:
If the number of instances wasn’t so small then I’d certainly consider the results strongly bullish.
A sensible sounding theory is just that – theory. This is an example of why I make every effort to test all of my trading and market bias ideas.
Note: Apologies for the sporadic posts this week. Things should return to normal next week.