Chart Advisor: Evaluating VIX Signals

Articles From: Investopedia
Website: Investopedia

By Frank Cappelleri, CMT, CFA

1/ Detecting Two-Way Volatility

2/ Gold’s Big Number

3/ The SMH Semiconductor ETF

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1/ Detecting Two-Way Volatility

When we hear the word, volatility, we instantly think of the VIX Volatility Index.  Why not?  It literally measures volume based on S&P 500 index options.

When the SPX experiences a big decline, the VIX typically rises.  The larger the stock market loss, the bigger the VIX advance.

This is very well understood.

It’s also not a surprise to know that in 2022, the number of daily declines of at least 1% was among the most ever at 65.  It was a bear market after all.  And the VIX advanced.

But there’s one thing that VIX fails to capture, and that’s volatility on UP days.  There were nearly just as many 1% advances in 2022 at 63.  Big advances tend to force the VIX lower.  It’s just how its measured, but this gives us a false sense of security.

Emotion drives big moves in BOTH directions, thus, when the market is logging large declines and large advances, there RISK exists on both sides – up and down.

While we can’t discount the VIX, itself, we should also keep a tab on the number of sizable daily moves.  A higher amount makes for a treacherous trading landscape.

2/ Gold’s Big Number

The 2,000 level for Gold is important for a few reasons.  First, it has round number significance.  “2,000” is easy to identify and to remember, which instantly puts it on a lot more radar screens.

Beyond that, as this long-term monthly chart shows, Gold has not closed above the 2,000 level on a monthly basis yet.  It tried to in 2020, 2022 and early 2023, but those pushes through 2,000 were sold aggressively.

That said, Gold appears to be in a more promising position this time for two major reasons.

1-The 2023 pullback has been shallower than the drawdowns that resulted from 2020-21 and 2022.   This shows that buyers have been more eager to buy the dip at higher prices now vs. before.

2-The recent rebound has helped construct this large potential bullish chart formation.  Using the simple measured move technique, a breakout that finally holds above 2,000 would target 2,180 initially and then 2,380.

3/ The SMH Semiconductor ETF

The SMH Semiconductor ETF hasn’t done much to get excited about in recent months, but could it be ready to rally again soon?  Over the last four days, SMH has been oscillating around its 200-day moving average (not pictured), which it hasn’t traded considerably below since reclaiming the long-term line in January’23.

However, the weekly chart of SMH is much more interesting. The ETF now is trying to bounce from the lower trendline of the pictured trading channel. In fact, the best buying opportunities in SMH have occurred near this line three times prior since the summer months.

Bigger picture, the ETF also has a chance to turn the recent downturn into a (bullish) falling wedge pattern, like we saw twice before in 2023.

Originally posted 1st November 2023

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