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Is the VIX at a Major Inflection Point?

The 10 area has emerged as a long-term foothold for the VIX

by 3/29/2012 2:05:44 PM
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I have been fascinated during the past couple of years with the behavior of the CBOE Market Volatility Index (VIX), and its tendency to experience major inflection points in the area of "halves," "doubles," or former areas of resistance. When expected or potential inflection points are ignored, the continuation moves tend to be explosive. While not precise, paying attention to these levels can serve as guide posts if you are attempting to predict where volatility -- as measured by the VIX -- is headed.

For example, take the VIX peak that occurred in March 2011 at 29.40, which was approximately double the prior month's low at 14.86. What's more, the February 2011 bottom was in the vicinity of the 2010 low. And when the VIX bottomed again in April 2011 at 14.40, it was about half of the March 2011 peak, also an area that characterized lows since 2010.

Monthly Chart of VIX since January 1990

The VIX's peak closing high in June 2011 was 50% above the prior month's closing low, near the 14.50 neighborhood. In early August 2011, the VIX's advance through its double calendar-year lows was a harbinger of impending explosive volatility, with the VIX peaking at 48 -- a roughly 236% jump from the calendar-year low. If you were to look at a long-term chart of the VIX, the peak at 48 may not have been all that surprising, as peaks in this area also occurred in 1997, 1998, 2001, 2002 and 2010. The one time that the 48 area was taken out happened at the height of the financial crisis, when the VIX exploded to 90 -- or almost double the prior peaks.

After breaking out to its August 2011 peak, the first major trough came in late October, when the VIX fell to the 24 area. This was followed by a "secondary" peak at 36, or 1.5 times October's trough, as well as a 50% retracement of the August high and late October low. When the 2011 half-high was finally breached, the VIX extended its move lower, eventually stopping out at 18. From January through March, the index danced around this neighborhood, before finally experiencing five consecutive days below the 18 mark in mid-March.

Daily Chart of VIX since January 2011

At present, the VIX has struggled to close below its 2011 low, around 14.30. We'd expect any advance in the VIX to peak at 17.50, which is a 50% retracement of this month's high and low. We see the 20 area, which is a 50% retracement above the March 16 intraday low, as another potentially key level.

Should the VIX close below last year's low, a decline to 10 would be the next major level to watch. This area has been a floor since 1992. Speaking of the 10 level, note how the VIX has displayed the capability to spend long, sustained periods in this extreme area, whereas extremes near the highs tend to be short-lived.

Todd Salamone is our senior VP of research. For more of his thoughts on the market, follow Todd on Twitter.

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