Are We About to See An Increase in Volatility?

One of the many tools in technical analysis are Bollinger Bands, which measure a set standard deviation price has traveled from a defined Simple Moving Average, in a way it’s measuring the volatility of a price move. Many traders often use Bollinger Bands as levels of potential support and/or resistance. However, I’m much more concerned with the distance between the bands themselves. Which, when applied to the Volatility Index, is showing signs of a potential rise in the $VIX.

When the upper and lower Bollinger Bands compress, it’s a result of a lack of change as measured by standard deviation, in this case, over the last 20 trading days. History has shown us that when this compression in the width of the Bollinger Bands for Volatility gets low enough, it has preceded spikes. Below is a chart of the $VIX over the last three years, with the width of the Bollinger Bands shown in the top panel. I’ve put blue dots on the VIX when the width has fallen below 20. While the $VIX hasn’t spiked immediately following every instance of this occurring, many large moves in volatility have followed such a compression in the Bands.

VIX

To shine a little more light on this topic, below is a list of times we’ve seen the bands width fall below 20 for the first time in two weeks and the $VIX itself was below 25. While the percentage of the time volatility was higher the next 1, 2, 3, 5, 10, 15, and 20 days ranges from 43% to 65%, what stands out to me is the minimum and maximum changes. Typically the minimum move over the shown periods of time is less than 10%, the maximum advances in volatility have been quite large – the mid-double digits.

Even though the number of instances the $VIX has risen has been low (typically less than 50% depending on the time period), when it does go higher we have seen some very strong moves to the upside in volatility. With the width of the bands now sitting under 20, it’s possible we see volatility pick up over the coming two weeks, if not sooner.

Understanding the probabilities and potential outcomes of historical market data is an important tool to being a successful trader.

VIX compression table

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

One Of The Largest Single Day Advances in Volatility History

Yesterday was full of news out of Greece and whether the country could pay its debts while its citizens lined up to take a small maximum amount out of their checking accounts. As far as the equity market was concerned, the world was crashing! At least that’s what you would have thought by seeing how far the Volatility Index ($VIX) had risen.

On Twitter last week I mentioned that the way price and certain pieces of price-related data/indicators were acting, it seemed like we were setting up for a rise . Since then the $VIX has spiked over 55%.

In fact, this was the 11th largest rise in Volatility in 20 years! Only twice during the 2008 Financial Crisis did we see the $VIX advance by a greater amount in a single day. We finished up trading on Monday with the ‘fear index’ up nearly 40%. I’ve been discussing the decline breadth and momentum on both the blog and on Twitter, the number of stocks rising just hasn’t been able to keep up with the overall index. When this type of thing happens, a spark of international drama can be the needle that breaks the equity camel’s back, at least in the short-term, sending fear soaring like we did today.

So when were the most recent times this measure of trader concern rose at such a fast pace? 2011 and 2013. From those large pops in the the $VIX we saw Volatility mean-revert, falling 70% and 30%, respectively over the next days/weeks. I’m not calling for an immediate decline in Volatility, but historically it does tend to lose steam after such a strong rally, we’ll see if this time is any different.

VIX

 Full Disclosure: Certain client accounts may have positions in Volatility-related ETPs upon the time of this writing

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

The U.S. Equity Chart I’m Watching Right Now

Starting in late February I began to see some warning signs for the short-term movement in U.S. equities. On Feb. 23rd I wrote in my Technical Market Outlook, “While I think the current trend looks health the short-term price action appears to be stretched at the moment. Volatility ($VIX) momentum has been pushed down quite a bit. I wouldn’t be surprised if we see some bumps in the near future that could push the $VIX higher. We’ll see.” I also began tweeting some of the intraday/bearish charts I was seeing (here, here, and here). While the long-term price action in the S&P 500 still appears healthy (you can read more on this in the above mentioned Technical Market Outlook link) I still like to pay attention to the short-term price action as well.

Since then, volatility has risen about 20% and the S&P 500 has dropped a couple of percent, nothing major. But with this small period of weakness I want to show the U.S. equity chart I’m keeping an eye on that moves beyond just the intraday swings of the market.

Price
Below is a weekly chart of the S&P 500 ($SPX) going back to early 2012. Along with the $SPX I’ve included the 20-week (same as the often discussed 100-day) and the 50-week Moving Average. These Moving Averages have acted as support during prior dips in equities for the current up trend. As of the time of this writing, we are testing the 20-week right now. As price continues to make higher highs and higher lows, from a price action perspective things look fine and the trend is clearly up.

Momentum
Moving to momentum, I’ve included the Relative Strength Index (RSI) and the MACD indicators. Since 2012, the RSI has been in a bullish range as it moves from 40 to over 70. This is a good sign that buyers continue to move in and has helped define the ‘buyable dip’ theme that’s been taking place over the last several years. However, most recently, a bearish divergence has developed in both the RSI and the MACD momentum indicators. As price has trekked higher, momentum has begun making lower highs, which has typically preceded turning points.

If we do continue to see price move lower, taking the RSI and MACD with it, I’ll be watching to see if prior support in the Relative Strength Index is able to hold up and provide some relief for equity bulls. I will also be keeping a close eye on these longer-term Moving Averages (20- and 50-week) and see how price responds if (in the case of the 50-week) they do get tested.

In the meantime, I’ll respect the current up trend and the notion that breadth (not shown) has continued to confirm the the new highs in price which in my opinion should not be disregarded. But these are the levels I’m watching, we’ll see where price takes us.

S&P 500

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.