If I had to bet on only one thing this week, I’d bet on a spike in volatility.
Of course, it was only last Monday when I wrote, “Volatility is poised to snap back.” And, while the Volatility Index (VIX) did pop from 12.65 to 13.42 – a gain of just over 6% – that’s hardly the move I was looking for. The VIX is set up for a much stronger move.
Here’s the updated daily chart of the VIX…
The indicator at the bottom of the chart is the MACD histogram.
Longtime readers know we like to use the MACD momentum indicator to help identify potential reversals in a trend – either from a downtrend to an uptrend or from an uptrend to a downtrend. The MACD indicator will often reverse before the price of a stock reverses.
That’s not always true, though, in the case of the VIX. The MACD indicator for the VIX tends to move at the same time as the price. So, there’s not much predictive value in following the MACD indicator on the VIX.
There is value, however, in following the MACD histogram.
Without getting too complicated, the MACD histogram helps to identify a potential reversal in the MACD momentum indicator. In other words, the histogram is an indicator of an indicator.
Now… I won’t blame you if you’re rolling your eyes at this point. Using an indicator of an indicator to justify a trading position seems a little ridiculous. It’s like we’re reaching for anything to help confirm our bias.
But, in the case of the VIX, the MACD histogram has a pretty good track record for identifying reversals.
Look back at the chart above for some examples. While the VIX was falling last September, the MACD histogram was rising. Three weeks later, the VIX was 18% higher.
In March, while the VIX dropped to a lower low, the MACD histogram rallied. This “positive divergence” preceded a 71% spike in the VIX two weeks later.
Last Monday, the VIX dropped to a lower low. Meanwhile, the MACD histogram has been rising. I suspect this is warning us that the 6% rise we got in the VIX last week was just the beginning of a larger move higher in volatility.
Best regards and good trading,
Jeff Clark
Reader Mailbag
Today, a reader writes about their return to option trading…
Jeff, today I felt compelled to write you a thank you note. In short, I signed up for your services in February of this year. I started with a $10,000 investment which has now turned into $31,000 in 3 months. I used to trade options a long time ago, but ended up losing all the money I made, so I decided to quit trading 10 years ago. The main reason I quit is because I felt like I was gambling back then; I had no direction. I signed up to your publication with a little bit of hesitation, but after seeing your methodical approach and research, I must say that it’s the best decision I’ve made in years. I have your app on my phone and I must say that I read every single recommendation and alert! It makes my mornings! Once again, thank you!
– Fadi
Thank you, as always, for your thoughtful insights. Keep them coming right here.