With fear continuing to drain away from the VIX, it’s complacency that rules at present as the ultimate index of fear and greed continues to push ever lower and on towards the elusive single figures below ten. Last week’s price action was typical of many phases over the last few weeks, with the index initially rising on fear, only for this sentiment to drain away to be replaced with complacency once again. The price action in mid June was typical with the index first testing and then breaching the resistance now in place at 12.25, before closing lower and moving back towards the 10.25 region. In last week’s trading sessions the index tested this level once again, before failing and moving lower to close the week at 11.26. The resistance levels above are now clearly defined with the first in place at 12.25 and a second and much deeper region in the 13.75 area, an area of congestion which has been built over several months.
The monthly chart describes the longer term picture in more detail and the key here is the depth of support now coming into play in the 9.75 region. This is clearly evident on the volume at price histogram on the left of the chart, which extends back to 2006 and 2007, prior to the events if 2008 and 2009. As the index moves ever lower, so the prospect of a major reversal increases, but as always, markets can stay over sold or over bought for long periods of time, and should the VIX indeed move below 10 as expected, this in itself is not a signal of a reversal, but merely an early warning of possible trouble ahead. Note that the VIX stayed at this level for almost three years before the financial crisis broke, so there is no need to panic – just yet!
By Anna Coulling