Volatility (XIV)…It's Happening Again

August 30, 2017

After falling 26% from the July 8th high the XIV has seen a retrace and is now trading 15% up off the August 8th low. The smaller degree wave structure of the move up off that low has been very sloppy and has already provided quite a few twists and turns.

This type of action was not entirely unexpected as this is what we expect when we are within what we call in Elliott Wave terms a “Fourth Wave”. I noted this last week when I wrote that, “Fourth waves are some of the more difficult patterns to project and typically requires traders to be nimble…”

We may, however, be close to the point where we will once again see some clean and tradable setups coming our way in the XIV.

In 2015 I read an article discussing how the XIV was "The #1 stock in the world". That article was published on June 8th, 2015, and generated quite a bit of interest and discussion at the time of its publication. Fifteen days later, on June 23rd, 2015, the XIV topped and proceed to lose 69% of its value over the course of the next 6 months. During that same time period, the Dow Jones Industrial Average lost just 15% of its value. Furthermore, it took the XIV 1 ½ years and 233% in gains to recover the losses that were incurred during that move lower in the XIV.

On Monday, August 28th of this year, The New York Times published an article highlighting the exploits of a trader who is said to have turned $500,000 into $12 million. It was reported that this was done over the past five years by shorting the VIX through various Exchange Traded Notes. Apparently, this trader is now attempting to start a Hedge Fund to raise $100 million dollars using the same short VIX strategy.  

The important part of these stories is not the content of the story, but rather the story itself. Seeing articles extolling the virtues of the XIV (shorting Volatility) on their own is certainly not enough to make trading decisions based upon. The interest generated in these articles does provide additional evidence that Sentiment levels are reaching an extreme. 

So whether or not this current New York Times publication will prove to foretell the future of the XIV is still yet to be seen. It does, however, fit quite nicely with the topping pattern that we have been watching in the XIV for quite some time.

My primary expectation remains that the XIV should still see lower levels prior to once again seeing new highs over the 96.91 level. Ideally, I would prefer to see the XIV move back over the August 15th high prior to topping; I am, however, more focused on the larger degree Fibonacci resistance zone at this point in time. This resistance zone currently comes in at the 83.07-93.56 zone. As long as the XIV can hold under that zone, then the pattern is still suggestive that there still will be lower levels seen in before the XIV can once again find a long term bottom.

I will certainly be looking for opportunities to trade Volatility to the long side (short XIV) in the coming days and weeks. I have not, however, lost focus on the bigger picture and the fact that the XIV still likely has at least one final leg higher prior to seeing a larger degree top. This is a move that I certainly am looking to participate in. I would want to see the XIV show some bottoming signals while holding support prior to establishing any longer term positions on the long XIV side. Until that time comes, I will continue to remain nimble looking for shorter-term trades as the XIV works its way through this fourth wave pattern into the fall.

See charts illustrating the wave counts on the XIV.

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Mike Golembesky is a widely followed Elliott Wave technical analyst, covering U.S. Indices, Volatility Instruments, and Forex on ElliottWaveTrader.net (www.elliottwavetrader.net), a live Trading Room featuring intraday market analysis (including emini S&P 500, metals, oil, USD & VXX), interactive member-analyst forum, and detailed library of Elliott Wave education.

The Incas thought gold represented the glory of their sun god and referred to the precious metal as “Tears of the Sun.”