Trade Idea of the Day: VIX signals volatility rebound
The technical price chart of the Chicago Board Options Exchange's VIX Volatility Index - AKA, the 'Fear gauge' - shows a cross in its 'oversold' Slow Stochastic oscillator, as shown by the chart image below. The blue ‘%K line' has crossed the red line ‘%D line’ (also known as the ‘signal’ line) and proceeded to rise. Without going too deeply into the theory behind stochastic indicators, classically, technical analysts interpret crossovers like the one here as a sign that consolidation is over and that a rally may begin. Could the U.S. stock market mayhem seen in February and March make a comeback soon? Additional indications include that whilst the VIX has fallen sharply from February’s intense spikes, it has resolutely remained above a support zone between 14.64-13.3. In fact, aside from a brief dip early in March, the index has not traded below 15 since the end of January. Contrast that with the way the index wallowed close to record lows around 9 for much of 2017. Recent VIX trading suggests volatility will struggle to return to the unearthly calm seen last year. Amid an uncertain geopolitical outlook and simmering concerns over the pace of the Federal Reserve’s rate hikes, a rise of the VIX’s technical oscillators suggests another upsurge in stock market volatility may be imminent. As we’ve seen so far this year, whilst U.S. economic readings have largely been robust and the outlook for corporate earnings firm, investors have not been entirely shielded from turbulence whipped up by less predictable factors.
The key way to trade this potential opportunity, would be to wait for a clear rebound of the VIX before going short of a more liquid index of U.S. shares, particularly the S&P 500. The VIX is designed to be an early-warning alarm that volatile conditions for that market are near.
Technical price chart – CBOE VIX Volatility Index/CBOE VIX Index Futures (continuation) – daily intervals
Source: Thomson Reuters and City Index
StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.