There are many reasons why traders and investors should always keep a close eye on the VIX, but in these uncertain times it is even more imperative given the fragile geopolitical landscape and over extended equity markets. Indeed in many ways this describes the VIX almost perfectly on the weekly chart which continues to move through the year in a series of catenary price moves. These simply reflect the ebb and flow between panic and complacency. An initial surge in panic prompts a rise in the VIX, which is then followed by a calming process, as complacency sets in, and markets rise once again.
This has been the ongoing pattern throughout much of the latter part of 2012 and all of 2013. The peak points for the index in 2013 have been in the 22 area, and a floor of support in place at the 11.50. This is extremely well developed, and extends back to the early part of 2012. It is this area of the index that is now the key level, and will continue to define the point at which equity markets top out in the short term.
In the longer term, if risk appetite continues to be dominant, this level will have to be breached with the index moving down into single figures. It is at this point that equity markets will become highly unstable and overbought. As you would expect this deep area of price congestion is very clearly defined for us on the left of the chart with our volume at price histogram. For the time being, we are in another downward phase on the index, with market rising accordingly as risk appetite returns, but as we approach the floor of support once more, will this be breached or hold firm once again? Only time will tell.
By Anna Coulling