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The VIX performed its largest one-day spike since the US election earlier this week as trading volatility started to pick-up ahead of the Georgia run-off. As voting polls started to project an increasingly close election, the prospect of a “blue wave” in the US senate caused a major position adjustment in financial markets, and a subsequent spike in volatility.
Historically, the VIX has spiked around major US political events, and this is likely to remain the case before and after a winner is declared in the state of Georgia. The VIX has been unusually subdued over recent weeks, due to steady rise in stocks and a gradual decline in the value of the US dollar against all major counterpart currencies.
When stock markets start to decline, the VIX comes into its own. The VIX can suddenly explode into life when US stocks start to come-off, making it in an essential tool to guage the validity of a sudden market decline in stocks.
Typically, if the VIX is depressed and stocks are falling it may just be a technical move or a short-lived pullback. However, if the VIX is exploding higher and stocks are melting down then it is time to pay attention.
Traders look to gain exposure to expected or current volatility traditonally look to trade the VIX. It is often said that expecting volatility is the best way to trade the VIX, rather than trading the index after a volatility breakout has occurred.
This may be true, however, if we do see the Democrat party winning Georgia and gaining control of US senate, then the VIX could be about to become very active.
It is also worth pointing out that uncertainty surrounding President Trump’s departure from the White House over the coming weeks could also cause market volatility to increase. The protests in Washington DC opposing Joe Biden victory could also heighten matket tensions.
VIX Short-Term Technical Analysis
The four-hour time frame continues to highlight the overall importance of the 27 level. Multi-day price stabilization above this level may be needed to entice fresh technical buyers into the VIX long trade.
According to technical analysis a bullish inverted head and shoulders pattern is in play while the price holds above the 27 level. The overall size of the pattern implies that a breakout towards the 33 level could take place.
Source by ActivTrader.
If should be noted that an even larger bullish reversal pattern will form if the VIX reaches the 33 level. According to the size of the potential larger bullish pattern, the VIX could be headed towards the 43 level.
Key technical support for the index is currently found around the 25 and 23 levels, while the 28 and 30 levels currently offer key upside resistance prior to the 33 level.
VIX Medium-Term Technical Analysis
Looking at the daily time chart, the VIX has been in a bear market since November 6th last year. Currently the VIX’s trend defining 200-day moving average is located around the 30 level. Bulls will need to build significant upside traction to break the 30 level.
It should be said that a 4 point jump in the VIX did take place on Monday so it is still possible that the VIX could make another significant move and break the 30 mark.
Source by ActivTrader.
The daily time frame currently shows that the VIX is trading inside a falling price channel between the 22 and 34 levels. Typically, falling price channels are considered to be bullish pattern.
According to the size of the pattern the VIX could rall towards the 46 level if a bullish breakout takes place. Additionally, the RSI indicator shows that the index is not overbought at current levels.
