Volatility Index (VIX) oversold signal hints at rebound
The cyclical nature of volatility in the marketplace suggests traders might be looking for long positions on the VIX right now
IG’s volatility index (VIX) is derived from the Chicago Board Options Exchange (CBOE) volatility index. The CBOE Index is said to be a gauge of fear in the marketplace, aggregating 30 day put and call options on the S&P 500 Index. A rising VIX is said to show a higher level of protection hedges in the marketplace.
Volatility remains cyclical in nature, that is, a period of low volatility is a precursor to a period of high volatility and vice versa. Since the start of the global pandemic we have seen a new range for the VIX forming. This new price range trades at higher levels than historical means, suggesting a higher level of ‘Fear’ still underlying in the marketplace.
VIX: technical view
Now, we see the VIX trading near the support of this range around the 28.40 support level. The index is currently trading in oversold territory whilst at this support level. We are currently looking for a price reversal to support the oversold signal at current levels. In this situation a rebound in the VIX would be expected with 35.15 the initial resistance target. A break of this level would consider range resistance at 35.15 a further upside target from the move. Should the VIX instead move to close below the low at 26.15 the bullish indications would be deemed to have failed.
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