Chart of The Day
Implied Volatility vs Realized Volatility 
(VIX Index/SPX Index using RK002 for data) 
Click to Enlarge

 

 

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.   

   

Chart Notes

  • 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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