FINANCIAL ICEBERG
Always consider hidden risks
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 TECHNICALS
Volatility Complacency: Should we consider the VXX ETF?
 April 18 2016 ​( From TradingView , CNN)









The Situation

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Since we made almost a perfect double bottom technical pattern (January 20 ​2016 and February 11 2016) on the mighty SP500 Index to painfully climb into a steep uptrend channel, there is little doubt that the sentiment from market participants improved tremendously.

​​​​​In these greedy times (good to know that​​ the Fear and Greed Index ​from CNN Money is coming from extreme fear in mid-February 2016 ​to the greed level now at 70), this has helped the CBOE’s Volatility Index (VIX) to be in a steadily decline since the mid-February to reach near the lows in recent history. 

In fact, the VIX Index have been into a falling wedge technical pattern that started back since August 2015 as shown by the chart below. 





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VXX ETF ( Top Panel )​
CORRELATION​
VXX ETF over US Dollar Index - DXY Correlation ( Middle Panel )
​​SP500 Index - SPY ETF ( Bottom Panel - Candles )
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​​​One proxy ETF for the average investor for trading the VIX Index is the iPath S&P 500 VIX Short-Term Futures ETN VXX. This ETF offers investors a way to protect their portfolio through a Volatility play as it have a negative correlation to stocks.

​​It is interesting to look the behavior ​(correlation) ​of the VXX ETF in relation ​to the US Dollar Index ​​(USD-DXY) ​and the price behavior for the Mighty ​SP500 Index (SPY ETF).

​​​​As shown by the chart below, this correlation tells that the risks have not started ​to be fully priced into the foreign exchange market yet in terms of volatility: expect more volatility in the US Dollar and SP500 in the next few trading sessions...​​

​​​​​VXX/DXY correlation getting at the -0.70 zone on April 15 ​2016 and VIX ​at 13.62, well below its 200 DMA (Day Moving Average), ​indicating higher volatility ahead as history suggest... (See chart below - Middle Panel - Amber Line)
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SP500 Index Volatility ( VIX - Daily Candles )​​
​20 DMA ( Day Moving Average - Yellow Line )​
50 DMA ( Day Moving Average - Red Line )​​
200 DMA ( Day Moving Average - Green Line )​




Chart source: TradingView.comm


MMApr18VXXC1


http://money.cnn.com/data/fear-and-greed/


http://etfdb.com/etf/VXX/


https://en.wikipedia.org/wiki/Wedge_pattern


​​​For the SP500 index (SPY ETF), it started a bullish trend from an almost perfect double bottom (January 20 and February 11 2016) and already near the major resistance trendline that started back on May 20 2015.
​ (See chart above - Bottom Panel - Top Red Trendline) 

​​At a time the SPY ETF is near its ultimate resistance trendline, the VXX ETF is already at its support trendline that started back on August 10 2015.


​​So both the VIX ETF (VXX) and the SPY ETF are within a technical set up that could call for higher volatility environment as history suggest at a time we have the VXX/DXY correlation at a critical level.

So for investors looking at some protection for their stock portfolios, it could be a nice way to implement it quickly. But do not be misread​​ as investors should tread carefully when it comes to investing in VIX-aligned ETFs because they are extremely volatile trading products and the timing of a trade is critical.



Chart source: TradingView.comm


MMApr18VXXC2