Tuesday, February 16, 2016

Volatility (VXX) might be telling us where this is all going

Hindsight is always 20/20. Retrospectively, everything makes sense when are our rational minds look at the beginning and end of a series of particular events. The last World Cup was great a example: of course Germany would beat the hosts 7-1 in a semifinal game with their solid disciplined style and consistent, almost mechanical output each and every game. Of course they were destined to win the whole thing. I don't remember hearing anyone screaming at the top of their lungs at the beginning of the tournament that Germany was a sure thing, however. Events always have such a peculiar way of eventually working themselves out. It's for this reason that I am happy to report I am taking advantage of this counter-trend bounce, but looking at the Volatility indicators and ETF's (VXX) some hints are being dropped about where we may end up.

To get an idea of where we are headed we need to first look at the weekly charts for VXX. First of all, please remember we have broken out of our long-term downtrend pattern (shown by the red channel) which was followed by moving into a triangular condensing-pattern (blue dotted pattern). We have since broken upwards with the momentum indicators turning positive for the first time since about late 2011. Things are a little tired on the upside (on the RSI) and so to unwind these over-bought conditions I propose that a pullback on VXX to about $25.40. If that level fails to hold, we could have a false breakout on VXX with the market set to make another prolonged bullish run. Looking at the buildup in momentum (MACD) over the years I am not inclined to subscribe to this latter view.
There's another reason why I feel volatility will make another leap forward after this 'pause' and that's because an inverse head-and-shoulders pattern appears on the daily charts. The level of $25.40, which corresponds to the support level on the weekly charts, happens to also be a critical support level on a completely unrelated pattern on the daily charts. The next few weeks are critical if this pattern is to play out, so let's ask ourselves, "what will the catalyst be that makes volatility/VIX/VXX go into such a bullish pattern?" I personally think the reason will be oil with any agreement between Saudi Arabia and Russia to simply be posturing. Let's not forget these two countries are now  arming by proxy or have armed groups themselves in Syria. The idea that they produce any kind of agreement as quite naive.

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