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Volatility Soars as Investors Head for the Door

David Becker
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www.iforex.com
Volatility Soars as Investors Head for the Door

Believe it or not yesterday’s volatile price action was an inside day that followed an outside day reversal. So despite the 2% decline, the market according to technical analysis folk law is expected to continue to move higher. On Wednesday prices on the S&P 500 made a lower low and closed above the prior days high and on Thursday the high was less than Wednesday’s high and the low was above Wednesday’s low.

Despite this scenario, this price action seems like a correction is attempting to begin. Volatility continues to increase, as traders look for the exits. Ahead of the weekend, traders will unlikely hold on to long position of fear of a liquidation as the new week begins.

The VIX volatility index, which measures implied volatility on the S&P 500 index, touched 19.5%, and closed at 19% the highest level seen since late January of 2014. The VIX is known as the fear gauge and a higher index level makes it more expensive for investors to hedge their stock portfolios using options.

Oil prices have also continued to tumble with WTI crude oil hitting $84 per barrels the lowest in 2014. Continued strong production from the Bakken shale in North Dakota along with reduced global demand has generated significant headwinds for crude oil prices, which has eroded the value of energy shares. Large cap oil companies have tumbled along with crude oil prices, but the upside to consumers is they will have more discretionary income to spend during the holiday season.

The VIX soared 24% on Thursday, as the 50-day moving average crossed above the 200-day moving average, which shows that a long term trend is now in place. Momentum is positive with the MACD (moving average convergence divergence) index printing in positive territory with an upward sloping trajectory.

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