Heading into the final ninety minutes of Thursday’s session, what’s been the most interesting development of the day? Some bulls might be inclined to suggest China’s latest promiscuous innuendoes of room for further monetary action is the primary support for today’s move out of a rather tight multi-day trading range in the SP-500 ($SPX) now flirting with April’s highs of 1422. But dare we say it’s the VIX ($VIX)?
Figure 1: CBOE Volatility Index ($VIX) Daily
Shown above is the daily view of the past eight months for the VIX and believe it or not, market bulls have just been issued one fresh technical support backing higher prices in conjunction with favorable moving average alignment. What we’re referring to is Thursday’s session highs of 15.15% which tested the 10SMA and reversed. The short-term, neutralizing price action in the euphemistically called and mean-reverting Fear Gauge was made possible by several sessions of lateral congestion work in the SP-500; and whose action affects the pricing of the VIX with its own premiums used for the calculations.
The bigger picture, as traders also hopefully see, is an important one and one which has yet to be resolved. So far the VIX has set up a double bottom near multi-year lows around 13.5%. As a mean-reverting instrument which won’t ever go to zero, generational lows amount to an extreme reading of 8.6%. At the same time, premiums rarely become so confident as to stay below 10% for very long without some type of price shock to the market ultimately reawakening trader’s currently out of vogue, “risk off!” fetish. That all said, our view is bulls can try and play, but let the naked buyer; the one without overall, very affordable protection in place, beware.
Senior Options Writer, former Market Maker & fulltime Option Hedge Hog Advocate
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