Is A Super Spike Setting Up in the VIX?

The short answer: yes. The complete answer, however, is a bit more complicated and depends on exactly what one considers to be a super spike.

 

For many, a move to about 22 would qualify as a true spike up in the VIX and something that the daily chart below makes a strong case for and probably this summer. 

 

 

The introduction of QE3 has not been without its bouts of volatility with a very clear sideways range between about 11 and 22 having formed over the last nearly two years with the VIX hitting both sides rather reliably several times during this time period.

 

​Next up relative to this range is likely to be a move up on the descending coil of a Falling Wedge and a formation that represents a steady and then extreme decline in the expectation for market volatility. But herein lies the danger because it is the convergence of that complacency that creates a spring for a violent equal and opposite reaction back up and out of those apathetic conditions.

 

 

​The target of this current Falling Wedge is between about 18 and 22 and it is the pattern repetition that makes a strong case for its likely success and probably within weeks. 

 

Interestingly, this formation is also supported by the recent lack of intraday volatility. 

 

All of the energy building in this nearly two year range has not dissipated or been expended even as the VIX reads complacent. Rather this energy - or the nuanced tension between the buyers and sellers of the options underlying the VIX - has gone into conservation mode and this sets the stage for an explosive unwind of that pent-up energy and one that should produce a significant spike higher in the VIX and essentially the inverse of the last two months if not much of this year.

 

This reminds me a bit of the "calm before the storm" ahead of the Flash Crash in 2010 along with periods of time in the spring and early summer of 2011. 

 

It is supported by the fact that the last two highs forming the top of this range are, in fact, a nascent set of higher highs. From a wonky technical standpoint, these higher highs may pull for yet another higher high, and thus it will be very interesting to see if the coming spike out of the current Falling Wedge can top October's 20.19 and February's 21.48. 

 

If yes, it will create a bullish-for-volatility and bearish-for-stocks scenario.

 

But even so, is 22 - and a doubling of the recent low - a true super spike in theVIX? According to the weekly chart below, no.

 

 

This chart continues to make the case that it has been making for more than 2 years now for a move in the VIX not just to 2011's highs near 50 but to 2008's high near90.

 

What makes this possibility worth noting and perhaps even scary is the very fact that it has been building for five years now. Even though the Federal Reserve, ECB and BOJ have successfully pushed investors to the edge of the risk continuum, it hasn't been done without protest and uncertainty on the part of investors and this despite the extreme complacency that has been feared by many over the last couple of years.

 

This ironic tension and the equivalent of the equity markets going higher on the "most hated rally of all time" shows in the VIX as a potentially dangerous coil and one that appears to carry more latent energy than a similar coil that converged into the 2007 low before a more than equal and opposite move to about 90 came the following year.

 

And that - 90 or higher - undoubtedly qualifies as a super spike higher in the VIXand something that the long-term charts suggest may just be ahead even though the precise timing is less clear on vagaries of the VIX's five-year Falling Wedge. 

 

Should this formation be unleashed, however, on the combination of complacency lit by years of underlying confusion, it will become quite clear that a super spike has, in fact, been setting up in the VIX.

 

As always, thank you for taking the time to catch up on my thinking.

Courtesy of http://www.peaktheories.com

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