Alongside the USD index, the VIX is another of those powerful indices, which gives clear signals of the broad market sentiment which ebbs and flows on a daily basis. The VIX is often referred to as the fear index, as it displays the market mood and whether market players are in ‘risk on’, or ‘risk off’ territory. It is based on the balance of calls and puts in the options market, and therefore gives a powerful insight into whether traders and speculators are protecting their risky assets with puts, or buying calls anticipating a rise in the markets. As a result the VIX works inversely to equity markets, with the VIX falling as stock markets rise and the VIX rising as stock markets fall. All of this is governed by the old adage, when the VIX is low it’s time to go ( or sell ). So where are with in today’s market.
The daily VIX has been falling steadily since the peak of early June when the index hit a daily high of 28, before falling steadily, to close on Friday at 17.47 following the statement from Jackson Hole by Fed Chairman Ben Bernanke. Equity markets had been hoping for some clearer statement from Mr Bernanke, but the only hint given was that the FED was ready an willing to ‘pull the trigger’. Whilst the Hawkeye daily trend has turned bullish, the three day trend remains firmly bearish, and despite the recent buying volume of the last few days, it is interesting to note that Friday’s bar closed with white volume of ‘no demand’, possibly hinting that the recent move higher for the VIX could now be running out of steam. Any further move higher will need to breach the 21 price region where strong resistance awaits. To the downside, the platform of support is now in place in the 13 area on the chart, and should this be breached then we can expect to see further strong gains for equity markets towards the end of the year, but as always, once the VIX moves into single figures, then this will signal the end of the bull run, and a possible sharp sell of in due course.
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