Is the VIX losing downside Volatility?
Put Call action today suggested the VIX would fall in September but suggested a move much further below $27.50 was limited.
However, activity on Friday suggested a large downside move could be expected.
While it’s tough to measure market sentiment in a day, there are some things to look forward to.
So far my early post predictions have played out. Today I’m making a new prediction, a 22% (or more) drop in the VIX to $25 (or less) before Labor Day. Crazy?
Last year the Labor Day Rally pushed the VIX down more than 22% at a much lower level. The Volatility Index is still incredibly high above $30 even after several solid moves in the S&P. However, short term market rally’s following a “W” bottom in the indexes often retrace 50 to 75% before showing weakness. That could mean 1260 on the S&P. That’s only 4% higher than today’s close.
I have noted several times that a strong move above 1225 on the S&P would lead to a significant drop in the Volatility Index, possibly as much as 15%. That’s only 15 points higher than todays close.
Historically, after crossing back below the 20 day SMA, the VIX has dropped 21% from its 20 Day SMA within 7 trading sessions. Today the VIX dropped below its 20 day moving average. Normally, the higher the spike, the further below that moving average the VIX has fallen.
After crossing the 20 day moving average within 7 trading sessions, the VIX normally falls below its 50 day moving average and normally finds resistance in drastic moves at the 100 day moving average. Currently the 50 Day SMA is 25.93 and the 100 Day is 21.58.
More often than not the VIX returns to trading levels between the 50 day and 100 day moving averages. One should take a VIX move below the 20 day very seriously especially in today’s price action. On Friday the VIX closed at the 20 Day SMA finding some temporary support, today the VIX blew that support and closed 10% below the average.