Always consider hidden risks
Volatility Complacency: Should we consider the VXX ETF?
April 18 2016 ( From TradingView , CNN)
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.
VXX ETF ( Top Panel )
VXX ETF over US Dollar Index - DXY Correlation ( Middle Panel )
SP500 Index - SPY ETF ( Bottom Panel - Candles )
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)
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
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