Market Analysis

Volatility Rising II

This week we witnessed a sudden spike in volatility as markets underwent their first pronounced drop in 2018. This spike was well signaled in advance as the charts suggested it was coming.

Just last week I spoke about it in Volatility Rising:

“Volatility remains historically low, but have you noticed the rising tide? Volatility has been rising even as markets have been making new highs….

In 2017 these recent market highs would’ve produced $VIX readings in the 9-10 range. Not in 2018 so far. This and last week we saw consistent closes above the 200MA. That’s a notable change as all spikes above the 200MA in 2017 were sold.”

Mella had signaled an inverse forming, first in her member stream:

…and then on her public stream:

This is to show that technicals matter and provide tradable set-ups and I’ll talk more about this separately in the days ahead.

Yesterday we then saw not only the spike into 15.4, a 32% spike from the time Mella posted her chart, but also a break above the trend line we’ve been watching for more than a year:

At the same time we also saw the familiar poke above the 70 zone on the RSI, one which in 2017 has proved a reliable indicator for the $VIX to drop back into its hole so to speak.

So far, this move appears to signal a potential change. For one, the trend line is still holding ahead of the Fed. A renewed dovish Fed today could certainly calm the $VIX again.

But also the longer term charts I showed last week show familiar patterns:

For now we can observe an elaborate dance between $XIV and $VIX:

$XIV held its trend line while $VIX broke out. One of the two is lying and we’ll get clarity soon for the next short term move.

But volatility is sending a strong signal here: It’s not 2017 anymore. This is 2018 and volatility is rising and is demanding a return to its historic mean.

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Categories: Market Analysis

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