Monday, April 14, 2014

What to expect from the Vix

By Andrew Wilkinson

As selling accelerated last week the S&P 500 index (CME:SPM14) closed below its 50-day moving average, which currently stands at 1843. The 200-day average by comparison comes into play at 1761. And while the overall level of volatility has picked-up recently it remains well below highs that have coincided with prior negative breaches of the 50-day moving average level for stocks. The CBOE Vix index closed last week at 17.03.

On three-of-the-four previous occasions within the last year when stocks closed beneath the 50-day moving average, volatility has typically spiked to create an easily identifiable pattern. The average reading for the Vix during the four periods during which the bull market faced a significant challenge was 17.26. With the exception of the August breach of its 50-DMA, the Vix index rose just above 21.0 on each occasion.

Should investors’ exuberance for retail sales data slip during the next day or two, the outlook for stocks might be steered by last week’s low at 1814 ahead of support from the 200-DMA, which is currently 3.29% below Friday’s close. Despite the positive start we have not yet suffered the typical boost to volatility that occurs when stocks melt beneath the key technical level of the 50-day moving average.

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