Potential Higher Low in $VIX is key to watch

Going into the week of March 10th, I am watching the $VIX (Chicago Board Options Exchange Market Volatility Index) as a tell to possible market direction. As a trader and someone whose style is to mostly be a buyer of options premium, I am a constant watcher of the $VIX index to A) get an idea of the speed of the market and (B) as an indicator to determine how expensive options are.

While the market gap-up on March 4th was dramatic and extremely bullish, there are a few key things that I am watching in the $VIX and other measures of volatility.

First, the $VIX appears to be making a higher low relative to the range it has been for the entire 2013. Over the course of this bull market run, there have be a few sharp pullbacks. This usually leads to a spike in the $VIX and subsequent retraction. However, this last pullback and retraction has led to a higher low in the $VIX. This means that while the market has continued to move higher, fears haven’t been entirely elevated compared to other moves higher. Will the $VIX breakdown from here? I think that is a key to the bullish case from here and will allow us to continue in a prolong grind move. If the $VIX successful spikes from here it will have put in a higher low and will have a lot of merit to be on guard in this market. The chart below shows what I am watching. The bottom is the $VIX index and this is a comparison chart to the other major indexes. ImageThe VIX is a measure of implied volatility in the S&P 500 index options. While I won’t bore you with the nuances of how it is calculated. It is important to note that it does not reflect the speed of intra-day movement that something like calculating the average true range of the S&P.

As you can see, the ATR is also elevated and has not broken down to the low period of volatility enjoyed in the end of 2013 rally. ImageWhile this does mean to panic and go to cash, I would suggest to watch the $VIX carefully to help gauge how aggressive to be in the market. As well, as one of the factors to gauge how quick to be profits vs letting your winners run. Cash is a position and an easy way to stay defensive in this market. Presently, I am right around 50% cash. If the VIX were to breakdown from here, and given the that set-ups are attractive, I would put more money to work. If $VIX puts in the higher low, you will be happy that you stayed nimble.

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One thought on “Potential Higher Low in $VIX is key to watch

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