The VIX Signals Another Trading OpportunitySep 20, 2012
Chad Karnes, CMT
If it isn't broke don't fix it, the old saying goes. The VIX has been good to us before, and it may want to again. Right now it is close to giving us another tradable setup.
The famous Mathematician, Blaise Pascal said, “
His words seem very appropriate given the recent questions and criticisms surrounding the Fed’s latest announcement
Last week Mr. Bernanke and the Fed gave in to Wall Street’s begging and announced on 9/13 the now famous “infinite QE”. Whether it was reasonable or beyond reasonable we may never know, but while all the fanfare occurred, Wall Street strategists cheered, political analysts argued, and Economists disagreed, we ignored the noise and watched the tape to decipher any potential opportunities. What do we see?
First, the market (NYSEARCA:IVV) was obviously excited about the “surprise” announcement as it rallied 2% to end the week at its yearly high of 1464. The VIX also fell over 10% on that day. But, while the market made new highs for the year, the VIX interestingly did not make new yearly lows. This was a sign.
Using Past Performance TO Predict Future Performance
Since July we have talked about the importance of long term VIX support in the 13-15 range and the numerous buying opportunities in that zone. For five years it has been the floor for the VIX and continues to provide tradable bottoms. On Friday 9/14 the day after the Fed announcement, the VIX made an opening low at 13.51, but then rallied all day to close up rather significantly. The market (NYSEARCA:SPY) meanwhile also rallied which is not the norm when the VIX rallies and added support to a potential VIX bottom. More importantly, though, that low was still higher than the VIX’s 13.32 low back in August. In technical analysis we call this a non-confirmation as well as the existence of higher lows, both which often occur during trend changes.
This also happened at that previous August low, and we were able to capitalize on it then. On 8/21 with its price at $15.02, we stated in our ETF Profit Strategy Update, “Volatility continues to tease us hovering below $16. The price action of the VIX the last few weeks is the reason why I like to wait for confirmed trend changes using trendlines, and avoid trying to pick tops/bottoms. The VIX closed today at $15.02 and the downtrend resistance trendline now sits around $15.70. We continue to wait for a breakout before calling for a VIX bottom and/or market top. That time gets nearer by the day though. Once the breakout does occur, we will look for higher lows first and then higher highs next to help identify a target beyond the gap at $17.50, which is the first target”.
Two days later on 8/23 the VIX gave us the signal we were waiting for. It reached our target of $17.50 on 8/30 and got as high as $18.96. Below is the chart that accompanied that update.
(to see an updated version of the chart and key price levels click here.)
What is the VIX Telling Us Today?
Today the VIX has a similar setup as it did back in August. The Bernanke low of last week has provided a tradable bottom that formed a non-confirmation and higher lows that is now close to breaking out. Last night’s, 9/19, Technical Forecast explained how to take advantage of a VIX breakout, at what price to buy, and where to place the appropriate stop loss.
Some ETFs that can be used to take advantage of VIX setups, are the ProShares VIX Short-Term Futures ETF (NYSEARCA:VIXY), the ProShares Short VIX Short-Term Futures ETF (NYSEARCA:SVXY), and the ProShares Ultra VIX Short-Term Futures ETF (NYSEARCA:UVXY).
Used in conjunction with other tools, the VIX gives us clues about the market's moves. Each month the ETF Profit Strategy Newsletter, and a few times a week via the Technical Forecast, we use key indicators like sentiment, and breadth to identify high probability trading setups for the S&P 500, the VIX, and ETFs linked to major asset classes.
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