Chart of the Week: Volatility Index
Time for our chart of the week. And this week we’re gonna be focusing on the Volatility Index, or the VIX. Many people call it the fear index. It’s been on the rise, certainly since the beginning part of December. But not very many people have really noticed it until more recently. Let’s chart this up and see what we can figure out.
What caught my eye here is this stretch of higher lows and higher highs in the VIX over the past 4 1/2, almost 5 months since the beginning of December. You can see that it’s a little bit of a sloppy channel I put in there. But it’s not rising bottoms, and it’s not rising tops. And we did break through that lower end of the channel at the end of March but we bounced right back above it.
And then we see the move that happened just these past few days. Huge surge in the VIX closing above 17. And then on Monday, April 15 we saw a big surge up through 19, and we’re still above that 19 level.
As it is, the VIX is a little bit overbought right now. And you can see that with the RSI ticking above 70%. The last couple of times it went up to this area was a bit of a peak, so we could pull back down.
The Volatility Index is facing an impending crossover
But the one thing I want to isolate on here is the impending merging of the 20 and 200 day moving averages. If you look closely here – you can see the 20 day moving average is this dotted. This dark line over here is the 200 day moving average.
Now, for a good majority of this last rally, the 20 day moving average has been below the 200 day moving average. And that indicates a bullish condition for the markets.
And we got that crossover here towards the end of November. And we can see in kind the VIX kept coming down and it went down all the way to just under 12% for a little while in December – showing a lot of complacency in the market.
But now we have this 20 day moving average threatening to cross the 200 day moving average.
The last time we had a crossover, the markets dropped
Now let’s see what happened last time that occurred. We were up here at the middle part of October, and that’s when we set those October lows. Remember that this move up into the mid 20s from the high 17 area was a pretty vicious drop in the markets from here to there. It was about a 40% increase in volatility, and the markets went down quite sharply. When volatility is up – spiking like it is right now – were going to see a lot of volatility.
Now what does volatility mean? It simply means that ranges are expanding. Instead of seeing the markets go like this, it’s going like this – up and down big time.
That makes people a little bit uneasy about being invested in the markets. We know that a lot of people are pulling money out of the market right now, because interest rates are elevated, and they seem to be climbing every single day. The 10-year yield is above 4.6%. So we see people reaching for some protection here, and you can see it evident in the rise in the Volatility Index.
Where it’s going next
Keep an eye on the VIX over here. At some point in time, it’s gonna spike up and come right back down much like it did in the middle of February. The VIX had a spike right here and came back down. I think a lot of people were expecting that after Thursday. It spiked up and came back down, but it came right back up again on Friday with news of the attack in the Middle East.
And yesterday of course we tried to come back, but we couldn’t even get through this channel over here. And we closed near the highs of the session on the day. So keep an eye on the VIX. It’s an important indicator for us to pay attention to what the market is thinking at any moment in time.
So that’s the Volatility Index.
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