One of the best parts about using point and figure charts to analyze the markets is that it allows us to apply the concept of supply and demand to just about anything. Whether it be the stock price for AAPL, the price of Coffee futures, or even the strength of the US Dollar. In taking our analysis a step further, we wanted to discuss some recent developments on the VIX. This is a measure of expected 30 day stock market volatility and is calculated by the Chicago Board Options Exchange. As we stated in our post about TLT yesterday, during times of heightened volatility markets are often approaching key levels of supply and demand. This can be seen across various asset classes whether it be equities, commodities, or fixed income.
CBOE Volatility Index : (Point & Figure)
The point and figure chart of the VIX displays a massive base which had been forming for an extended period of time. In other words, supply and demand for volatility had been in a state of equilibrium for the most part during this time frame. This scenario changed on Wednesday when the VIX Index traded through 18 and confirmed a spread triple top break out. The overhead supply which had been containing the VIX Index below 18.00 during the period of consolidation finally gave way. The measured move target for this break out is 28.50.
Conclusion:
A brief technical update on the VIX index displays volatility may continue to rise in the near term. The overhead supply which had been keeping the VIX in check was broken to the upside earlier this week. Having a consistent game plan toward risk management throughout turbulent market environments is vital in order to help limit losses. At Dorsey Wright Money Management, we achieve this by following our systematic relative strength based investing models which allow us to eliminate the human emotion during periods of heightened volatility.
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