Volatility Opportunity – Potential Return To Strong Support Levels

By | December 3, 2018

We were neutral about the market going into this weekend. The G-20 outcome seemed, in our opinion, skewed to the risk rather than the reward side.

As it has turned out, some compromise was reached and the futures market is implying a very strong open this morning. We will not be chasing this move. As it appears now we probably will be doing very little today, but of course we will be vigilant for opportunity.

One such opportunity may be in the Volatility Index (VIX). Take a look at the weekly chart.

The Volatility Index (VIX) is in the upper panel and the iPath S&P 500 VIX ST Futures ETN (VXX) is in the lower panel. The VIX was relatively quiet during 2017 and found a firm floor in the 10 to 9 area.

The incredible surge in volatility in February this year saw the index leap higher and then spend the next several months moderating. This time it found a higher base in the 11 area and it has been firm footing for 2018.

A second less volatile move came in October as equity prices dropped and the VIX rallied. The index moderated above its 40 week (~200 day) moving average, and it looked like a third higher base at the 16 level was in place.

The Monday open will negate that premise and penetrate 16 level support.

Now take a look at how the recent action correlated with the iPath S&P 500 VIX ST Futures ETN (VXX) chart. The $32 level on the VXX correlates to the 16 level on the VIX. That is where support for the ETN has been since October.

Monday’s strong open in equities suggests that the VXX will open near the $32 area. That is a 6.8% drop from Friday’s close, and right on support. The unlikely potential over the next several days for the VXX to continue down lower or spike down to the $26 level (correlates to the 11 level on the VIX) bears close monitoring.

The point of this analysis is that declines in these volatility measures could be an opportunity to enter at levels that haven’t been visited in a long time and have proven in the past to be solid support. This adds affords protection or presents trading opportunity in a economic and market backdrop that seems to be in flux, and vulnerable to sudden shifts in sentiment.

(Check for updates today on the VXX and $VIX charts, and percent figures on implied ranges.)

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