VIX (Fear Ratio) could be forming bullish pattern
Courtesy of Chris Kimble's Charting Solutions
[Click on charts to enlarge]
The chart below looks back on the past 31 days and reflects that the S&P 500 did well (up over 5%). During this rally, investors confidence grew and fear levels fell hard (over 30%).
The above chart takes a look at the VIX index, which appears to be forming a bullish falling wedge, with the apex of the wedge pattern coming into play as the VIX index is hitting rising support.
Falling wedges suggest than an asset will rally around 65% of the time.
The top chart shows that the VIX index created a bullish falling wedge in late 2014. Once the VIX broke the upside of the bullish pattern, it rallied 100% in 11 days! During this VIX rally, SPY fell just under 5%.
The chart below highlights a sharp rally in the inverse fear ETN XIV. It has had a sharp rally over the past month, after it seemed to form a double bottom. XIV remains inside of a falling channel and is testing its 38% Fib level.
Some extreme moves in fear levels have taken place in the past month. Either the VIX index breaking above resistance of the bullish falling wedge, or XIV breaking below its steep rising support line, would suggest that fear levels are due to rally in the short-term.
Full Disclosure – Kimble's Premium Members have owned XIV over the past few weeks and are harvesting positions at Fib resistance.
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Phil's option trade idea for going long volatility involves using the VXX, an ETN that tracks the VIX "fear index." The specific trade is:
1) Buy the VXX April 17, 2015 $24/$29 bull call spread for an outlay of $2.15. (The April 17, 2015 $24 call is trading for $3.80 and the April $29 call is trading for $1.65.) Thus the $5 spread has a net cost of about $2.15 — a reasonable price for a $5 spread.
2) With the VIX at $14.30, Phil would also sell the April 17, 2015, $25 put for about $1.00 to drop the net price of the combined options array to $1.15.
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