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Volatility Ready To Breakout!

  • Written by Syndicated Publisher 38 Comments38 Comments Comments
    November 22, 2011

    Similar to early August when the SPX fell 150 points in four days, the vix has formed a similar wedge pattern although longer in duration. Both of these patterns are within a four month up trending channel.

    The question of course is which direction will it break higher or lower?

     

    Perhaps the implied volatility skew can shed some insight on which direction is more probable. Below is a chart of the implied volatility skew VS the vix.

    Notice how the two have correlated extremely well since August and now have diverged sharply. The last time such a divergence happened was on August 4 which resulted in the wedge breaking to the upside.

     

    One more piece of anecdotal evidence that favors a move higher in the vix and lower in equities is the following chart of the divergence between the skew and vix VS the SPX.

    These two have correlated extremely well. Notice how this divergence is moving lower while the SPX is following.

    As always there are no guarantees but the data is pretty supportive of the vix moving sharply higher in the coming day(s).

    Images: Flickr (licence attribution)

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