Get Ready for a Huge Move

Get ready for an increase in volatility.

 

The Volatility Index (VIX) – often used as a measuring stick for fear among investors – is at its lowest level since last September. More important is the Bollinger Bands – a measure of volatility for the VIX – are also as narrow as they've been since last September.

 

Take a look...

 

 

This is a chart of the VIX plotted along with its Bollinger Bands. The bottom chart shows the width of those bands.

 

The VIX typically declines as investors grow more complacent and less fearful with the stock market. You can see how the decline from elevated levels back in March has coincided with the rally in stock prices. Conversely, the VIX rallies as investors grow more fearful – as evidenced by the rocket shot higher in the VIX last September.

 

The current relatively low level of the VIX indicates investors are less fearful of a decline in stock prices.

 

But it's the narrow Bollinger Bands that grab my attention. You see, tight Bollinger Bands usually occur before a large-scale move in the chart. So the VIX is on the verge of a big move one way or the other.

 

It doesn't have to be to the upside. Indeed, a sharp decline in the VIX would widen the Bollinger Bands just as quickly as a sharp rise. However, with the VIX trading at its lowest level of the year, the odds favor a move higher.

 

And a rising VIX usually means lower stock prices.

 

Best regards and good trading,

 

Jeff Clark

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