Findings on Volatility (2011-10-07 VIX analysis)

R.I.P. to Steve Jobs. Though I'm not Apple fans, he did help a lot in innovation.

So basically yesterday European Central Bank announced that they would introduce year-long loan again to let banks get enough cash. Some strategists even said that the biggest rally in S&P500 since 1998 in the last quarter in 2011.

Interesting enough, isn't it? Though I don't think the markets would surge crazily, I think the plunge will temporarily end here when HSI touched the medium-term support at around 16,100. Rebound is following and the index will probably test the resistant at 18,000 again. This is the first stage, if it passes, then then next resistant will be at around 19,700.

Today I am going to talk about volatility.

Daily chart of Volatility Index (.VIX):















The index has been moving in a range recently, as shown in the red on the above chart. This channel ranges from around 32-48.

But the channel is a downward trend channel, so both the support level and resistant level drop as time passes by.

In last few days, S&P moved around 1% every day, compared with more than 2-3% days ago, so the index dropped.

As suggested by the channel, the next support level is at around 30. Therefore, it is quite likely that VIX would drop to around 30 from the current level. This means that S&P500 won't suffer from great slumps at least in these few days.

Apart from this, I found an interesting pattern on weekly chart.

Weekly chart of Volatility Index (.VIX):















Basically, as mentioned before, the index could hardly surge above the level of around 50. The only time was due to sub-prime mortgage crisis in 2007-2008. VIX was up to almost 90.

However, VIX did try a few times to break this critical level. We can see that there were six trials in total including the two recent ones.

Interestingly, each time after two trials, the index would be quite likely to drop.

The first box represents the two trials in 1997 and 1998, after that the index remained at the trading range of 15-30 for almost 3 years.

The second box represents the two trials in 2001 and 2002, and after that the index slumped to the range of 9-15 for almost 5 years.

So this time we observe a double top again. Would it follow the historical fact? or would it spike and break 50?

Not having a breakout at 50 means that S&P500 would calm down and is not likely to plunge. It might even snowball to higher levels. So it also means that EU and US both get rid of the poor situations now and global stock markets would gradually rise.