Below are a number of charts which I believe offer some good insight to volatility and what is next for the markets. No magic bullet here, purely a play on the most probable outcome based on the chart patterns.
Vix VS Skew
I posted this chart on Thursday and a few had a hard time seeing the inverse correlation between the Skew and the Vix. Two important points I want to make with this chart.
Point 1 – look at the three red boxes showing the correlating trends (emphasis on trend). Notice the final red box and how the trend is lower (i.e. Vix higher).
Point 2 – notice how a similar divergence occurred between the Skew and the Vix right before a major jump in the Vix (now and where the arrow is drawn). That is why I say an imminent move higher in the Vix is highly probable.
The next three charts show a repeating pattern between now and early August before the big equity decline.
This shows the current divergence between the SPX and the Skew
This shows the same divergence on August 4, 2011.
This shows what the SPX did over the next two weeks.
Take an 8% rally over 14 hours on nothing but short covering, a Vix due to pop, divergence on the skew and you have the recipe for a large move lower in equities. Again no magic bullet but the probabilities would say this is the most likely outcome.
Images: Flickr (licence attribution)
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