Trade Idea of the Day: VIX signals volatility rebound

Could the U.S. stock market mayhem seen in February and March make a comeback soon?

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

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