Friday, December 25, 2015

Volatility (VIX): It's hot out so I'm wearing shorts (only to $17.90)

VIX promises to be quite volatile for 2016 (I myself intend to be arbitrating this volatility with UVXY and SVXY). Long term, VIX has emerged from a very long and steep descending channel (visible in the weekly chart) which should already interest some people. Is an ascedning wave going to go in as part of a larger three wave down structure? Is a bottoming pattern going to develop? I am partial to the second school of thought now that we are in a positive interest rate environment and while fears persisted since 2008 of deflation the market had to appear to be rising which meant VIX had to be falling.This paradigm no longer applies in a post-interest-rate-rise market. Tremendous forces will be wanting to keep VIX low while equally strong forces will forcing a rise in response to what an increasing number of observers are calling a "fundamentally flawed system."
On the daily charts two patterns have emerged. The obvious one, and the one that is apparent on the weekly charts, is the condensing/pinching pattern. The second one that is a little more recent is the declining triangle pattern. The flat base for our triangle at $17.90 has emerged from lows put in during the last week of October and the first week of December. Declining triangles have a tendency to break upwards more often than not. In the coming week we will see if the lower diagonal support line holds at around $18.50 in which case a third hit will be made in our triangle meaning a later breakout can occur, although I would predict it won't a few weeks/months more as the triangle pattern is quite large.
There's a lot be said about being in cash for the near term as a lot of general market direction is being decided at the moment and VIX charts are a perfect example of this. Please be aware that weekly ATR trend reversal thresholds (the two pink lines) are at $16.42 and $22.82. The upper ATR trend reversal coincides with a breakout of the upper diagonal support.