Confluences

Contango Slope Index Confluences

While the Contango Slope Index (CSI) provides valuable insights into volatility structure and market sentiment, pairing it with well-established technical confluences enhances its reliability and applicability in real-world trading strategies.

Below are several high-impact technical confluences that align with the CSI's logic and improve signal accuracy.

1. 200-Day Moving Average (Price Filter)

Confluence Logic: Use the S&P 500 (SPX) 200-day SMA as a macro trend filter. The CSI performs best when aligned with the broader market trend.

• ✅ Valid Bullish Signal: CSI < 0 (Backwardation) and SPX > 200-day SMA → High-probability recovery or continuation of bull market.

• 🚫 Avoid Bullish Signal: CSI < 0 but SPX < 200-day SMA → May indicate a "bear market rally"—higher risk, shorter duration.

• ⚠️ Caution Zone: CSI > 0.0232 and SPX > 200-day SMA → Complacency in uptrend—watch for reversal signs.

Why it works: Prevents counter-trend entries and improves win rate by filtering signals within structural context.

2. RSI Divergence (Momentum Confirmation)

Confluence Logic: Combine CSI regime shifts with daily RSI(14) price divergence to detect hidden strength or exhaustion.

• ✅ Strong Buy Setup: CSI crosses below 0 (Backwardation begins) + Price makes new low, RSI does not (Bullish RSI divergence)

• ✅ Strong Sell Warning: CSI > 0.0232 + Price makes new high, RSI makes lower high (Bearish divergence)

Why it works: Adds momentum layer to volatility structure—confirms whether price action supports the sentiment shift.

3. Volume-Weighted Moving Average (VWMA) Breakout

Confluence Logic: Use VWMA(20) on SPX as a dynamic support/resistance level. CSI signals gain strength when confirmed by volume-weighted breakout.

• ✅ High-Confidence Entry: CSI enters backwardation + Price closes above VWMA(20) on above-average volume`

• ✅ Defensive Exit: CSI shows elevated contango + Price closes below VWMA(20) with expanding volume`

Why it works: Volume confirms institutional participation—separates noise from conviction.

4. VIX Spot vs. CSI Divergence

Confluence Logic: Compare the behavior of spot VIX with the CSI trend to detect shifts in forward expectations.

• ✅ Early Warning of Regime Change: Spot VIX is flat or declining but CSI slope is becoming more negative → Forward curve is steepening into backwardation despite calming spot—can precede renewed fear.

• ✅ Stability Signal: Spot VIX spikes but CSI remains positive and above MA → Temporary volatility, no structural shift—likely a buying opportunity.

Why it works: Decouples spot noise from term structure dynamics.

5. Put/Call Ratio (Sentiment Overlay)

Confluence Logic: Use the CBOE Total Put/Call Ratio (daily) to validate extreme sentiment.

• ✅ High-Conviction Buy Signal: CSI < 0 + Put/Call Ratio > 1.05 → Fear confirmed by options market.

• ✅ Overbought Caution: CSI > 0.0232 + Put/Call Ratio < 0.85 → Excessive bullishness—risk of correction.

Why it works: Adds another layer of market-based sentiment confirmation.

6. 52-Week High/Low Percent Indicator

Confluence Logic: Use the percentage of S&P 500 stocks at 52-week highs vs. lows (McClellan Oscillator-style) to assess internal strength.

• ✅ Robust CSI Signal: CSI enters backwardation + % Stocks at 52W Low > % at High → Broad capitulation confirmed.

• ✅ Complacency Confirmed: CSI > 0.0232 + % Highs > 70% → Widespread optimism—risk of mean reversion.

Why it works: Measures breadth—if only a few stocks drive the move, the CSI signal may be less reliable.

7. Yield Curve Slope (10Y-2Y Treasury Spread)

Confluence Logic: Federal Reserve policy impacts volatility structure. The Treasury term premium affects VIX contango.

• ✅ Higher-Probability Backwardation Rally: CSI < 0 + Yield curve steepening after inversion → Macroeconomic support for recovery.

• 🚫 Caution During Inversion: CSI < 0 but 10Y-2Y < -0.50% → Recession risk may override volatility signal.

Why it works: Links macro-financial conditions to volatility behavior.

8. Dip Index

Confluence Logic: Volatility sentiment (CSI) must align with price structure resilience (Dip Index). A fear signal is only actionable if price has stopped reacting to downside shocks.

8.1. Higher-Probability Reversal Setup:

CSI < 0 + Dip Index declining from >7.0 → Fear confirmed, selling exhaustion evident.

Action: High-conviction long entry; target 3–6% over 4–8 weeks.

Example: March 2020 – CSI dropped to -0.018%/yr while Dip Index fell from 8.4 to 6.2 within two weeks. SPX stabilized and entered strong recovery.

8.2. Recovery Confirmation (Post-Bottom):

CSI crosses above 0 + Dip Index already in downtrend → Sentiment normalizing as price structure strengthens.

Action: Add to long positions; remove hedges. Suitable for trend-following re-entry.

Rationale: The Dip Index lead confirms structural healing before CSI turns positive—early confirmation of sustainable rebound.

8.3. Overheat Warning (Blow-Off Risk):

CSI > 0.0232 + Dip Index < 5.0 and stable → Complacency in options market, minimal pullbacks in price.

Action: Reduce risk exposure. Avoid new longs. Consider volatility hedges.

Historical context: Late 2017 and January 2021 – both conditions present before sharp corrections.

8.4. Structural Decay (Hidden Fragility):

CSI ~ 0 (neutral) + Dip Index rising over time → Market makes higher highs but with deeper corrections.

Action: Tighten stops; rotate to defensive sectors; monitor for breadth breakdown.

Why it matters: Volatility remains calm (flat CSI), but increasing dip depth reveals weakening demand—a divergence not captured by sentiment alone.

8.5. False Dip Trap (Don’t Buy the Dip):

CSI > 0.0232 + Dip Index rising → Complacency persists despite deteriorating price structure.

Action: Exit longs on failed breakout. High risk of sharp correction.

Signal failure mode: A rally on shallow dips loses integrity when dip depth increases—warning of distribution masked by elevated contango.

Optimal Confluence Framework

Confluence	Bullish Signal (Entry)	Bearish Warning (Risk)
200-day SMA	CSI < 0 & SPX > SMA200	CSI > 0.0232 & SPX < SMA200
RSI(14) Divergence	Price low, RSI higher	Price high, RSI lower
VWMA Breakout	Close above VWMA(20) on volume	Close below VWMA(20)
Spot VIX vs CSI	VIX flat, CSI falling	VIX down, CSI rising fast
Put/Call Ratio	Ratio > 1.05 + CSI < 0	Ratio < 0.85 + CSI > 0.0232
52W High/Low %	More lows than highs	70% at highs
Yield Curve	Steepening post-inversion	Deep inversion
Dip Index	Falling from elevated level + CSI < 0 or crossing up	Rising trend + CSI > 0.0232 or flat

The Contango Slope Index excels as a regime-detection engine, but its predictive power multiplies when combined with price, volume, sentiment, and macro confluences.

For systematic use, consider a scoring system:

• Assign +1 for each confirming confluence

• Only act when ≥3 confluences align