Chart of The Day
Implied Volatility vs Realized Volatility
(VIX Index/SPX Index using RK002 for data)
IS VOLATILITY CHEAP OR EXPENSIVE?
These are the weekly and daily charts. We will use the CBOE S&P500 Volatility Index as a proxy for implied and use the S&P500 30 Day Realized Volatility. Most analysis I've seen usually takes a look at what the mean value is over the entire data set then looks at standard deviations away. That approach misses two things: a lack of a dynamic and adaptive approach that utilizes volatility itself and frequent opportunities (how often is that 2 standard deviation from a static mean going to signal). We will use the tools of Volatility Based Technical Analysis (VBTA) to get a better look.
Our mantra is "money is made at the extremes." With known tendencies that have been quantitatively demonstrated across several markets and time frames, it is easier to take such opportunities. You can view the statistical evidence for MetaSwing's components here:
- To get a look at the relative value of volatility, we will use multi time framed support/resistance. I have shaded weekly support using blue and red, and then replicated these exact same areas on the daily chart.
- I have lined up the prices on both charts to make the concept of multi time framed support easier to see.
- November 30th through January 5th multi time framed support was being tested (blue).
- Most recently, from April 12th through May 2nd multi time framed support was being tested (red).
- Getting even more granular, the most recent bounce of volatility off of the SR 3-4 zone between 1.57-1.50 along with immediate resistance (rising upper N Band) giving room to run near 2.00 as it currently stands. The next multi time framed resistance level is near 2.60 (shaded red with the blue arrow).
- Additionally, forward looking Trend and Trend Strength are positive on both time frames. This all points to the idea of continuation higher/a higher range setting up.
- This is just one way of demonstrating how you could incorporate VBTA into your analysis to come up with assisting your directional views with accurate volatility forecasts.
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