Volatility Breakout?

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The last time I mentioned the VIX I showed a similar chart with the same trendlines as this one. As of the time of this typing (3 pm ET) it seems that the VIX will likely close above those trendlines and well above the upper bollinger band.

Most often when I discuss bollinger bands it is in relation to overbought oversold extremes and looking at it as a contrary indicator. However, for those who don't use them a lot, that is only part of their use. Another way to use them is in identifying breakouts from a range. In this case when the bands are squeezed together for a while and the underlying issue is going sideways, then you see a big move close outside one of the bands, that is often the direction of a new trend.

So while expecting the VIX to fall from the upper band has worked repeatedly during this rally, I don't expect that in this case. The VIX never formed a basing area until this 25.00 level and the trendline breakout and VIX divergence with the S&P are all suggestions to me that this is a breakout move. If so, that likely means the recent high in the indexes was a longer (or simply long) lasting top.

I will try to go into more details after the close.


As follow-up notes, the recent EUO trade was stopped out. The corresponding stop point on UUP was not hit though. That is one of the frustrations with the leveraged funds in that you can't always count on the leveraged one holding the same support points as the unleveraged ones. However, the benefits come when a trend starts and the leveraged funds outperform their objective because of compounding effects. I am still bullish on the dollar and will look at a new trade on UUP or EUO very soon.

Also, if the SDS trade entered in July was not still open, I would probably be suggesting a new trade today or tomorrow, but with the short-term picture basically oversold, I need to see more follow through to better determine if this top is legit. My suspicion is that it is for several reasons, but in a trend this strong, waiting for an overbalancing type of correction where the decline off the top is larger than any other decline in the recent leg up is probably wise for establishing new position trades. Then if there is a larger and faster decline than the June-July pullback, I'd say there is a very high probability that this major advance since March is complete.