The CBOE Volatility Index^® (VIX^®) is a measure of implied volatility for various S&P 500^® Index (SPX) options. Demand for those options increases premiums ultimately raising VIX^® levels. What do the current levels suggest for market sentiment? For now, it seems to be at a slight impasse.

To start with a big picture view, Figure 1 displays a monthly chart for VXO, the CBOE’s original volatility index which was based on the implied volatility [IV] of S&P 100^® Index (OEX) options. An OEX overlay is also provided on this arithmetic scale line chart.

Figure 1 VXO Monthly Line Chart with OEX Overlay and Rate of Change [24, 12]

A 24 month Rate of Change [ROC] indicator with a 12 month simple moving average [SMA] appears below the OEX, along with horizontal lines at the 14.5 and 11 levels for the index. Since the late 1980’s, continued downward drift occurs for the index with an eventual spike out of the range. In the mid-1990’s the spike was followed by coil like congestion that began a period of increased volatility in 1996.

In 2007, the transition to increased volatility was much more abrupt after one false start above 14.50. With one day remaining in the month VXO closed at 14.55. Will there be a bounce for volatility at these levels or will the index’s downward drift be the more dominant characteristic for the next couple of years?

Figure 2 provides a weekly line chart for the current VIX with an overlay of SPY, the widely followed exchanged-traded fund [ETF] that tracks SPX. Once again an ROC indicator is added to the chart along with a Relative Strength Comparison [RSC] for the VIX:SPY ratio.

Figure 2 VIX Weekly Line Chart with SPY Overlay, RSC and ROC [44, 22]

For the re-constructed VIX, the 11.50 – 15.50 level has served as the basing range for the index and with one day remaining in the week the VIX is at 15.41. As can be seen during other periods, it’s possible for the range to serve as a support or congestion area.

The upper trending support line on RSC was drawn using data from 2008-2011 and extended in both directions. When looking to the left, it’s noted that the line served as both support and resistance along the way. Current levels place the RSC right at support. This seems to favor a bit of a bounce for the VIX on a weekly basis; however, moderate pierces of the trend line have occurred along the way.

Figure 3 VIX Daily Line Chart with SPY Overlay, RSC and ROC [8, 4]

As a last view, Figure 3 provides a daily line chart of the VIX with an SPY overlay and an RSC, ROC [8, 4] and horizontal lines at 14.50 and 15.50. This shorter-term picture displays more congestion in the narrow range while the VIX:SPY ratio continues downward using a previous resistance line as support. While the downward drift for volatility is taking a brief pause, SPY continues to see strength. If nothing else the relative complacency among market participants does seem to be waning as we move into April, the month that has experienced intermediate term peaks over the last two years. The 4-day SMA for the VIX’s 8-day ROC has been rising since March expiration suggesting a bit more caution entering the market.

Clare White, CMT
Contributing Writer and Options Strategist
Optionetics.com ~ Your Options Education Site

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