Chart of The Day
Term Structure Insight - SP500 Volatility Index 30 days vs. SP500 Volatility Index 63 Days (VIX Index / VXV Index)
Analyzing Extremes in the VIX Term Structure
On the top is the Term Structure (VIX / VXV) and the bottom is the S&P500 (SPX Index). There are some real advantages to using statistically tested Volatility Based Technical Analysis, as we will see.
- The chart is the ratio of short term implied volatility to longer term volatility, giving insight into the effects of terms structure (on the SP500 in this case).
- This is simply a quick look at extremes from a support/resistance perspective in the VIV / VXV ratio (Term Structure) and their translation into the S&P500 price action.
- We have outlined signals of potential price pauses/reversals in the SPX with red and cyan dashed arrows. The accuracy of the signals is 69%. Extreme peaks/troughs in the term structure ratio translate into pause/reversals in the S&P500 Index.
- What is interesting, is that most recently, the term structure has not signaled a top, though the SPX Index signaled near term headwinds with an Exit Long Signal (E). This would be interpreted as a pullback in an improving, continuing uptrend. This is very contradictory to what the headline news is portraying.
- This analysis should be complimented with work on the S&P500 Index itself as well as the VIX Index, giving a more complete picture potential moves in the market and volatility.
With known tendencies that have been quantitatively demonstrated across several markets and time frames, including volatility, it is easier to lean against volatility based support/resistance. And this is before including any other technical work, like momentum or trend. You can view the statistical evidence for MetaSwing's components here:
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