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Chart of the Day / How to Easily Spot Pivots in the VIX

How to Easily Spot Pivots in the VIX

October 16, 2018

If you can predict volatility, you can prepare in advance for big moves in the market.

There are ways we can do this.   One is to trade volatility any time the Volatility Index (VIX) falls under 10.  The other is to keep an eye on technical pivot points.

Buy Volatility when VIX Drops under 10

The infamous fear gauge – the VIX – fell to an unusual low of less than 10 in May 2017 – something that hasn’t happened since December 1993.  In the single digits, the idea is that all is well.  Calm has resumed.  But it’s at these points when smart investors begin to worry.

Take a look at this two-year chart of the VIX.

Notice what happens each time the VIX dropped under 10.  Markets were calm for a bit.  But not longer after each drop under 10, the VIX popped higher. Since May 2017, it happened about 10 to 11 times.  In short, whenever the VIX drops under 10, buy VIX related ETFs, and consider shorting the market.

Some of the best ways to trade a potential spike in volatility is with the following:

  • Velocity Shares Daily 2x VIX Short-Term ETN (TVIX)
  • iPath S&P 500 VIX Short-Term Futures (VXX)
  • ProShares Ultra VIX Short-Term Futures (UVXY)

 Technical Pivot Points work Just as Well

 Not only can we trade the VIX when it drops under 10, we can short the VIX and related stocks based on historical technical markers.

Let’s again take a look at the two-year VIX chart. Notice what happens when the VIX moves to or above its upper Bollinger Band (2,20), coupled with relative strength (RSI) at or above its 70-line, coupled with Williams’ %R at or above its 20-line.

Every single time that has happened, the VIX has reversed course.  Once you spot a likely pivot, short volatility and prepare for a potential move higher in the broader markets.

Some of the best ways to trade a potential spike in volatility is with the following:

  • ProSharesShort VIX Short-Term Futures ETF (SVXY
  • VelocityShares DailyInverse VIX Medium-Term ETN (ZIV)

After watching these same technical setups for 20+ years, why not use it to benefit from potential moves in the market?