Tuesday, February 24, 2009

Volatility Cycles

VIX is the ticker symbol for the Chicago Board Options Exchange Volatility Index, a popular measure of the implied volatility of S&P 500 index options. A high value corresponds to a more volatile market and therefore more costly options, which can be used to defray risk from volatility. If investors see high risks of a change in prices, they require a greater premium to insure against such a change by selling options. Often referred to as the fear index, it represents one measure of the market's expectation of volatility over the next 30 day period.

From Wikipedia, the free encyclopedia

Below is my Sixty-minute Trend and Elliott charts on the VIX:

One characteristic of market volatility is that stock prices usually move opposite volatility. When stock prices rally, volatility drops, when stock prices fall, volatility rises. Forecast one, forecast both. The EW chart shows the VIX completing five waves up yesterday and today, what appears to be an "A" wave down. This should be followed by a "B" wave back up near the the prior Fifth Wave high. The suggestion is that stock prices will now fall while VIX rises in a "B" Wave.

Any help from the left side, the Trend chart? Sure. Every sharp drop in volatility (like today) is usually followed by a sharp rise in volatility (tomorrow?).

Here is a Cycles chart on VIX:

Today's drop in VIX coincides with a cycle low. The chart is forecasting that VIX will now rise into March 3rd, suggesting the inverse for equity prices, a drop into March 3rd. This is exactly what the EW and Trend analysis charts are forecasting, i.e. a rise in VIX and a fall in stock prices.

Below is a new Cycles chart on SPY, the S&P 500 ETF:

The above Cycles chart of SPY is showing both a small blip up which would account for today's action, and then lower into the first few days of March, thus confirming the VIX analysis.


1 comment:

Anonymous said...

Not sure if I will truely trust the VIX cycles this time. According to the cycles VIX was supposed to fall down from feb 19th till today feb 25, whereas the opposite happened.

What does the DOW EW say? Did we complete wave 3 of 5?