Courtesy of John Nyaradi.
Fear was the name of the game last week as investors sold out on the Fed and its “Operation Twist,” and continued worrying about Europe, Greece and global recession.
Fear ruled, but as ETF investors, we have a way to seek profits from fear and turn that chart upside down into what could be considerable potential gains.
The VIX, the CBOE Volatility Index, also known as the “fear” indicator, uses the implied volatility of S&P 500 index options and is an index of the market’s forward looking view of volatility for the next 30 days. This indicator is widely viewed as a way to measure market risk and forecast future movements.
Some observers say that when the VIX is low, market risk is low, and prices are likely to trend higher. This camp also says that when the VIX is high, lower prices are ahead as fear is the dominating force in the market. Contrarians say to “sell the greed, buy the fear” and so when the VIX is high, as it is now, contrarians would be anticipating a rally in the indexes, and when it’s low, they would be expecting a reversion to the mean and lower stock prices ahead.
However, judging by the iPath S&P 500 VIX Short Term Futures ETN (VXX) and after witnessing the bloodbath on Wall Street last week, my view is that the parabolic rise for (VXX) likely indicates lower prices ahead for the U.S. stock market:
Chart courtesy of www.stockcharts.com
In this chart above of VXX, the 50 day moving average crossed the 200 day moving average about two weeks ago, thus indicating a “Golden Cross” or buy signal. The MACD indicator is also in an upwards trend and is just breaking “zero” in the positive direction, which confirms momentum running in favor of a higher VXX in days ahead.
You’ll notice that VXX has logged nearly a 100% gain since this move started in early August.
So as fear vibrates around the world, ETFs like the VXX can offer potential profits in these volatile markets and a way to benefit from corresponding declines in the major indexes. Successfully trading the VIX requires discipline and a proven trading system, but for investors and traders armed with the proper skills, potential upside can be excellent in both up and down markets.
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