Volatility ETF showing bias towards trending higher

The volatility index rose to 18.6 on Monday as investors gradually took money off the table again. The S&P 500 index ran into the resistance at the 2062 level on Friday and continued to push lower today closing at 2046. This keeps the trading range in play along with the indecision on direction short term. As we discussed in the notes for the outlook this week, too many issues left open and not enough belief in the growth going forward. Crude oil rose to $52.83 up 2.2% Monday, unlike last week that did nothing to rally stocks. Greece was back in the headlines relative the ECB lending requirements to keep the country solvent. That was more of a drag on the markets today than higher oil prices were a positive. As I have now said for the last eight weeks you have to let this unfold, practice patients and look for the right opportunities as they present themselves. This is a traders market and it has to be treated with respect of the risk it presents.

The chart below is the iPath S&P 500 Short Futures ETF (VXX) for the Volatility Index (VIX). I have been tracking this fund throughout the consolidation in the broad index. The chart of the VIX is in a consolidation wedge as you can see on the second chart below. As the chart approaches the apex of the triangle/wedge pattern the greater the likelihood of a decision in direction… up or down. A rise in volatility would favor the downside for the broader index and a decline in volatility would favor the upside for the index.

In the same vein the chart of VXX has been trending higher through this consolidation phase. That is favoring the index moving higher. Today the 50 DMA crossed up through the 200 DMA also known as the golden cross or a bullish indicator for the chart. The trend plus the key cross is leaning towards more volatility… and that could lead to more downside or accelerated downside in the index. MACD ( a momentum indicator) is trading above one… and that puts the momentum in a positive light and Stochastic is at 48.5 and thus not showing overbought conditions, and the RSI is at 48.5 adding to the evidence VXX is not overbought. That would give us a bias towards the acceleration higher in the VIX. I am not attempting to speculation on direction, but I am adding up the evidence that is leaning towards volatility continuing to trend higher and in turn keep the markets either within the consolidation range or break lower as the selling accelerates. This is a key indicator currently on my watch list that will define direction… for better or for worse.




It is important to let the trend determine action, but it is also important to look at the evidence as a confirmation of the trend and the opportunity to make money from the resulting move. I like how this is unfolding and the pace at which it is coming together. Let it continue to unfold and take what the market offers relative to the result.