Right here we go once more. The nice volatility crushing of inventory markets that occurs when markets levitate relentlessly and everybody will get bullish. However don’t let the calm waters throughout this choices expiry week idiot you — the calm received’t final.
We’ve seen such intervals of volatility compression many occasions earlier than in the previous few years, particularly through the historic volatility crush of 2017. What invariably occurs is that issues get too calm, power builds up, and we get an enormous launch in volatility out of the blue.
In our technical view, markets are establishing for one more spike of measurement and maybe a bigger spike than most individuals anticipate.
And sure, one can establish patterns forward of time that even counsel particular targets (see Mella’s piece on charting volatility).
Right here’s the massive volatility image of the previous few years:
What’s the principle message right here? Large structural patterns of compression interrupted by short-term spikes ensuing within the constructing of bullish descending wedges that ultimately produce a a lot bigger spike (purple patterns). The large spikes then end in an aggressive crush of the VIX
in an excessive tight falling wedge sample.
We noticed one in 2015 following the August 2015 correction, and one other huge one in early 2018 following the February correction and, we simply witnessed one once more following the December lows, a sample that produced a fast spike from 13.5 to 18 final week previous to this present choices expiry week.
All of those tight wedges produce an eventual counterspike of measurement coming from overly compressed situations.
One notable characteristic: When VIX will get crushed following spikes any gaps on the best way down ultimately get stuffed. All of them.
And so right here we discover ourselves with Thursday seeing the bottom VIX print of 2019:
A number of key observations:
VIX has already damaged out of its latest wedge sample. This week’s compression, whereas producing decrease costs, seems to easily retest its damaged pattern line. Word additionally that VIX has a evident open hole within the 24/25 space. The yr is younger nonetheless, and there may be loads of room to ultimately fill this hole.
One other characteristic of this rally: At the moment six open gaps on the S&P 500.
“All gaps will fill, if ever” Artwork Cashin as soon as famously quipped.
Whereas some gaps can keep open and unfilled for years this huge variety of open gaps are unlikely to stay unfilled for an prolonged interval. Certainly the rally of January 2018 additionally was riddled with open gaps. All of them stuffed in February 2018.
However there’s a bigger volatility construction looming that means a way more sinister image to unfold someday in 2019.
A chart from Mella:
Her charts excel of their simplicity however readability. This reveals relative energy in VIX regardless of decrease costs whereas forming a bullish sample. It helps not solely the notion of a VIX hole fill at 24/25, however maybe a spike into the 30s. She additionally nonetheless has a sample that means a possible run to VIX 50 coming.
Volatility compression can prolong as we’ve seen earlier than, and this sample can counsel prints within the 12 vary being potential. But it surely additionally strongly means that the following huge transfer in VIX is just not decrease, however fairly a launch larger. Loads larger.
Sven Henrich is founder and the lead market strategist of NorthmanTrader.com. He has been a frequent contributor to CNBC and MarketWatch, and is well-known for his technical, directional and macro evaluation of world fairness markets. Comply with him on Twitter at @NorthmanTrader.