Chart of the Week: VIX
We’re going to be focusing on the VIX; VIX is the symbol. That’s the volatility index. It basically measures volatility over the next 30 days. They call it the fear index, because when it’s rising, people are getting scared and buying protection.
It’s not really something we want to trade. However, I’ve always advocated using protection, using puts – SPY, DIA, IWM, QQQ puts, you can even buy the VXX if you want to play a pure VIX mover. But certainly buying some protection is going to help you when volatility is starting to spike, as we’ve seen more recently.
We bottomed out at this $12 and change level. It was a bit too low for most people’s comfort, and we did see a lot of put buying coming in because the VIX remained elevated even as the markets were going down. That was in this area here in July. We’ve seen a breakout this month in August.
We are seeing numerous bullish indicators
And the candles have turned blue – they were teal – now they’re blue, which is a strong bullish condition for this particular instrument.
We have the 200 day moving average coming in at just under 19% here. We can see some dealer indicators on this fear index are starting to show some bullish qualities.
The TDI here in the middle – which is how relative strength compares to bollinger bands – it’s very bullish over here. The MACD has turned to a bullish buy signal as well.
Let’s take a look at a wider view with bigger candles of the VIX here. You can see how strong this candle was yesterday on August 8, and we can see that the breakout here was strong.
The markets can have a lot of damage down to it while the VIX is in spiking mode. It is in spiking mode right now.
A pop in volatility means markets are going down
When is it going to come down? That’s not a question I ever have to answer. I have to pay attention to when it comes down. When we get a big pop in volatility like in March, in a very sharp and short way, then that’ll be a clue that people are going to start selling volatility. As of yesterday, people are not selling volatility, they are buying volatility, they are buying protection. They are worried that the markets are going to go down. With a lot of inflation data coming out this week – and earnings coming out later in the week – people understandably are going to be a little nervous about markets going down.
Pay attention to what volatility is doing. The VIX is an important component in determining the risk management that you’d make in your accounts, in your trading.
That’s the VIX. Be careful here – stocks are going down when the VIX is rising.
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