INDEXCBOE:VIX in Falling Trend
Volatility index S&P500 appears to be in a falling trend, however is now testing the floor of a declining trend channel potentially providing a reaction up. For the longer term a continued decline within the trend channel can be expected. INDEXCBOE:VIX is moving within a rectangle formation with support currently found at 9.09 and resistance at 16.90. A decisive break through one of these levels would indicate a new direction. A negative signal presented itself when a rectangle formation by the break down through the support at 14.10. A further fall to 5.81 or lower is signalled. INDEXCBOE:VIX has marginally broken up through the resistance at points 10.30 a resent as Aug 3rd 2017. An established break predicts a further rise. The index is overall assessed as technically slightly negative for the long term.
$VIX & $VXN Volatility Indexes
INDEXCBOE:VIX or the $VIX is the 30-day annualized implied volatility of the S&P 500 Index Options. In addition, the $VXN is the 30-day annualized implied volatility of the Nasdaq 100 Index Options. When markets crash or move downward quickly, put options often become quite popular. Traders bid up the price of these put options, which manifests itself as an increase in the implied volatility level; thus an increase in the $VIX and $VXN index. The basic relationship between stock and index prices and the $VIX and $VXN is presented next:
- When prices fall, the $VIX and $VXN Indexes rise.
- In contrast, when prices rise, the $VIX and $VXN Indexes fall.
The relationship can be summed up by a famous traders’ statement: “When the VIX is high it’s time to buy; when the VIX is low it’s time to go.”
VIX & VXN Potential Buy Signal
When the $VIX or $VXN spike (usually they both spike during the same periods) a trader might go contrarian and buy. If history repeats itself, buying $VIX and $VXN spikes may prove profitable. Nevertheless, the Mutual Fund mantra applies: “Past performance is not indicative of future performance”.
The trend of the $VIX and $VXN Indexes can add another helpful level of analysis to price and volume indicators.