The Vix has formed a potential double bottom so I thought readers may be interested in a post.
For those not familiar with the VIX, it is an index of the volatility component of US stock option prices. As a general rule expectations of high volatility are associated with major market declines. This is why VIX is often referred to as the “fear index”.
On the other hand low option volatility is usually associated with orderly markets. This often applies when there is a steady, long lasting up trend in place. Very much what we have had in US stock markets since last July
You can trade the Vix as a CFD. However, even if you don’t trade the index itself, it’s worth keeping an eye on as a trader. It can be a valuable contrarian index for “risk” markets, not just equities but also currencies and commodities
When the Vix is at very low levels ( e.g less than 17), the market is at historically complacent levels. In this situation the market is exposed to bad news and this is often associated with major market peaks. VIX suggests the consensus view is anticipating an ongoing orderly bull market and is likely to be wrong footed by bad news. This doesn’t mean the VIX can’t stay low for a long time, just that when sell offs do occur, they can be violent when the VIX is low. If nothing else it’s a useful reminder to stay disciplined about stop losses on long risk trades in these situations.
You can also get some useful insight into other markets by charting the VIX. Significant breaks by the VIX are often associated with major moves in stock, currency and commodity markets. Also, support and resistance on the VIX often coincides with other markets finishing trends or correcting.
Interesting to see then that the VIX is currently at a bit of an inflexion point. A break above the dashed red line on the chart would represent a break out of a conventional double bottom and may be associated with selling in risk markets.
An initial target following a double bottom break may around 22 on the index. This uses the measuring rule ( measuring 100% of the height of the double bottom pattern and adding it to the break point). This 100% level pretty much coincides with a 78.6% retracement of the last swing down in the VIX
On the other hand, if VIX respects the current resistance and does not break out of the double bottom then it will remain in a rectangle pattern at relatively low levels. Whilst it stays in this rectangle, traders would expect the stock market to remain orderly and the current rally to remain intact
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