As of yesterday, I thought it would be fitting to pose a question that the market seems to have been dodging for a while. That question is, is it time to pay the piper? What we're talking about is the CBOE Volatility Index (or VIX). To those who may not watch it that closely, the VIX is considered a fear gauge. When the VIX hits an extreme reading, we expect to see stocks make a major reversal (it works going in both directions). And to those who do monitor the VIX on a regular basis, you'll know that the VIX has been at stunningly low levels for months. That's a sign of extreme complacency and confidence......which is also often a sign of a market top. Have the months and months of low VIX readings finally caught up with us? Is it time to pay the piper? Let's take a look.

Well, it's easy to be a bull when stocks are rising, and it's easy to be a bear when stocks are falling. So after yesterday, it's a little like Monday-morning-quarterbacking to call this market weak. On the other hand, none of the indexes are under their previous lows for the year, so the market is still technically just in a range. However, the VIX is taking on a complexion that we haven'' seen in a while, and that's why we're growing very concerned.

But first, a quick explanation of the CBOE Volatility Index for any new readers....

In a nutshell, the VIX is the ratio of the prices of a set group of call options and the prices of a certain group of put options. The Chicago Board of Option Exchange (or CBOE) monitors and publishes this data on a real-time basis. For traders, the VIX is considered a fear gauge, since the ratio will fluctuate as investors move between various degrees of bullishness and bearishness as time moves on. So how does that help us? By noting when the VIX hits extreme levels, traders are able to pinpoint a likely reversal for stocks. This works in bullish as well as bearish situations, as our chart below illustrates. To indicate 'extreme' reading for the VIX, we just wrapped Bollinger Band (blue) around it. Obviously the VIX has been a great tool recently, confirming the tops and bottoms by creating a near-mirror-image of the S&P 500.

S&P 500 versus the CBOE Volatility Index - Daily

So would that mean yesterday's high VIX reading is the beginning of a bullish move, as it has been for the last few months? There's always that possibility, but from here, it looks the opposite is going to be the case. Instead of making a peak (a pointed high, like a mountain peak), the CBOE Volatility Index may be on the way to much higher levels, like we saw just a few months ago. If that's the case, and the VIX keeps moving upward, that's actually a bearish scenario for stocks.

In fact, the whole reason we're highlighting this chart today is because the current VIX chart suggests that very thing is going to happen.

To anybody who has been a fan of the VIX for more than a year or two, you'll know that these readings between 10 and 20 have been alarmingly low. The historic 'norm' is between 20 and 40, so when you're consistently under that range and the market is still going generally higher, then something has to give eventually. Could that time be now? Could it be time to pay the piper for the last couple of years worth of market gains and constantly lower VIX readings? Based on our current chart, it's a real possibility.

On the lower portion of our chart, you can see that the VIX has been pushed lower since October by a pretty important resistance line (blue). What makes this resistance line so much more meaningful is the fact that the S&P 500 was guided by a mirror-image support line. Each found their respective support or resistance almost simultaneously on two separate occasions over the last five months (October 26th and January 24th). Were it just one of those lines or the other being broken, this might not be that big of a deal, but the correlation of the two has just been too strong too ignore. Now that we see the S&P 500 falling under support as well the VIX shooting above the last possible resistance line, we have to think there's something significant going on. That significant something, as you may have guessed, could be melt-down for stocks, and a melt-up for the VIX.  Take a look at the chart, and make the decision for yourself.

S&P 500 (with support) and CBOE Volatility Index (with resistance) - Daily

Are we over-reacting? Maybe. With expiration being tomorrow, option trading is really getting wild, so I'd say wait till next week before jumping the gun based on this chart. However, this slow, inching change in tide isn't exactly new. Over the last several weeks, we've seen the downtrend for the VIX slowing down, as is the uptrend for the market. We may be closer to reversals (for both) than anybody realizes just yet. Keep a close eye on the VIX, as it's already waving a red flag.

Now, I don't want overstate the impact here - the VIX moving higher will not change the way we think about investing. But I do want to point out that, for the market, everything eventually returns to its median levels. For the VIX, that means a return to the 20-40 range is going to have to happen sometime. It is possible (and likely) that the VIX can migrate back up to its typical 30 area without stocks falling the entire time. However, that return to 30 for the VIX will surely involve at least some pockets of weakness for stocks, and what looms on the horizon may be just that. Ideally, the VIX will rise faster than the market falls, so the impact on stocks will be minimized as it returns to its long-term average. But as we said, it will still coincide with some bearish pressures for the market. We'll see.

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Price Headley is the founder and chief analyst of BigTrends.com,