Here is a daily chart showing the VIX in the upper panel and the SPX in the lower panel, with Bollinger Bands (click to enlarge):

The purple arrow pointing to Friday’s candle shows that the VIX almost gave a sell signal. The bulls weren’t quite carried-away enough to push it below the lower Bollinger Band, but it was very close.

In the last episode on January 11th (blue arrows), the VIX opened and closed beneath its lower BB. That was an extreme burst of bullish complacency. We don’t quite have that at the moment, and while the market could push higher from here, the odds do indeed favor the bears.

If you want to short the market here, look at the blue arrows again. It took the market over a week to roll over after a very strong sell-signal from the VIX. Back then, you had plenty of time to wait for an ideal entry point, though it is possible that traders are more skittish now.

The VIX approached its lower Bollinger Band yesterday, but didn’t hit it. However, the NASDAQ 100′s Vixen pierced its BB before bouncing back a bit to close above it. So, the market was very close to giving the same overbought signal that it did back at the top in January.

The market was in a precarious position before Bernanke sprung a surprise rate hike on it after the bell yesterday. And when you combine those two things with today’s options expiration, the market is set up for a Triple Lindy with no water in the pool.

While the bulls pray to the inflation gods that the CPI number at 8:30am doesn’t signal an urgent need for more rate hikes, they can take solace in the fact that the Fed doesn’t normally begin to raise rates until it is confident that the business cycle has turned up. And I think that there is a good chance that they have timed it just right. So, in the longer view, this jolt to the market may not be significant.

After the bell, Fed Chairman Ben Bernanke surprised the market with the first interest-rate hike since the recession began. The market is not reacting well to the discount-rate hike so far: Here is a 15-minute chart of the futures from 9:00am to 9:00pm (click to enlarge):

The timing of this is very curious. The rate hike itself is inconsequential, so there was no need to spring it on the market like this. Why not just wait until the next FOMC meeting when the market would have girded its loins for such a surprise?

Of course, if you knew this was coming, you could have loaded the boat with out-of-the-money February puts which will have absurd gains tomorrow. It is options-expiration day after all, right? And that makes the timing even more curious. If I were Bernanke, I would have opex marked on my calendar, and I would not make any sudden moves right before then. Especially after the market was closed and the only choice left to bulls was to meekly accept their pole-axing after an egregious gap-down in the morning.

Note to bulls: Take a look at the space between your eyes. If you see a red dot there, it might be from an agent dispatched from Washington to take you out.

Wikipedia has pictures of China’s gigantic ghost mall.

Make sure to see my earnings report chart from last night.

The video below is from the February 8, 2010 episode of CNBC’s “Fast Money” show. At 5:45 into the show, the so-called “Commodities King”, Dennis Gartman comes on. He is very bearish and says: “Everything gets hit hard”. See for yourself:

The SPX was at 1056.74 at that moment, and went straight up over the next six trading days. Here is an hourly chart of the SPX (click to enlarge):

By contrast, on that day, I was pointing out the bullish hammer candle from the previous trading day. Take that Gartman!

Note to Gartman: you have been demoted from “King” to “Jester”. Please turn in your crown and scepter. Security is on their way to escort you from the palace. Enjoy your new belled cap.