In March 2013 the
Volatility S&P 500 Index
(INDEXCBOE:VIX) did something it had not done in over six years. It
closed below $12.
This six year low in March was accompanied by a new all-time
closing high in the market as the
(INDEXSP:.INX) surpassed its 2007 price high of 1565.
Since then the VIX has seen its fair shares of ups and downs, but
interestingly it has yet to reach lower levels than it did back in
It has also found support numerous times since then, setting up a
high probability trade opportunity.
New Market Highs, Yet No New VIX Lows
Even though the S&P has added over 200 points since March's VIX
low of $11.05, the VIX has yet to confirm the market's rally by
making a new low itself.
Typically the VIX falls when the market rallies and rises when the
market falls, and generally this is the case and has been the
reality over the past year. In technical analysis this is called
confirming, which is when two highly correlated assets are behaving
as expected confirming one another's trend.
However, the VIX also typically makes lower lows when the market
makes higher highs and makes higher highs as the market makes new
lows, and this is something that has not been occurring. In
technical analysis this is called diverging which occurs when two
typically highly correlated assets are not confirming one another.
Sometimes the easiest way to view these relationships in action is
by looking at price history, which I show and label in the chart
The VIX Setup
In the chart above there are six major talking points that help us
reconcile the VIX's current trade setup.
1. In March, new six year lows were made on the VIX which
accompanied a new all time high in the
(NYSEARCA:SPY) - This is what would be expected
2. In April, May, August, September, and again now in November, new
all time high S&P prices were made, yet the VIX did not make
new lows - This is not expected, but presents opportunity
3. Since the 6 year VIX low in March and shown below the green
zone, the VIX has yet to close below $12. Support has always come
in at $12 or above, keeping risk of loss low
4. Shown by the green zone, the VIX has also spent very few days in
the $12-$13 zone. It usually rallies from this level, also keeping
risk of loss low
5. When the VIX rallies, it usually pops very quickly, often headed
to the upper teens just as it did in April, June, September, and
October. This helps us identify a profit target
6. The VIX rallies around every two months as shown by the black
vertical lines (40 trading days). The next timing of the VIX rally
cycle is mid-December
The VIX Trade in Action
As you can see, this VIX setup is not new. It has been occurring
since March of this year, right where we identified the opportunity
in our June ETF Profit Strategy Newsletter published 5/24.
Our trade alert was buying the VIX July $13 call options for $370.
We sold half that position one month later for an 84% gain as the
VIX rallied into the upper teens. We sold the remaining half on 7/5
for another 22% gain.
Again in September, as the VIX crept back toward its support zone,
we saw a similar setup, pocketing a 31% gain along with numerous
other VIX trades this year captured in our twice weekly Technical
This setup has offered multiple profit opportunities and the VIX
looks to be in a similar situation now again.
The Two-Month VIX Cycle
Not only has the VIX been a good option to hedge your portfolio
when it falls below $13, it has shown to be a reliable two month
cycle as mentioned above, offering speculators excellent
opportunity for profits.
That two month cycle results in another expected VIX pop by
mid-December. What just so happens to be coming up in mid-December?
The next deadline for U.S. Budget Negotiations is scheduled for
December 13, 2013. Given the VIX's history, current technical
setups, and reliable cyclicality, December again is expected to
bring some fireworks to the markets with the VIX in position to
benefit the most.
Editor's note: This story by Chad Karnes originally appeared on
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