Observations on the VIX and Why It's Important

02/11/2016 8:00 am EST

Focus: OPTIONS

Since the volatility index has made a series of three higher peaks since last November, Marty Chenard of StockTiming.com takes to the charts and points out that risk now is that it makes another higher peak in the coming days and what this could mean for the markets.

The VIX is derived from the S&P 500 (SPX) (SPY) options for the next 30 days. So, it is a representation of the market expectations during the next 30-day period.

Note that it is derived from the S&P 500 options. That is important because the S&P 500 is a favored index used by institutional investors. The reason for this is because the S&P 500 is the most representative index of the economy's health due to its wide sector representation.

So, the VIX is an important index to be watched which is why we are posting its chart Wednesday.

The first observation to make (on the chart) are the fan lines since the peak high made last August.

Correlating with that are the VIX peaks made since August. (Now is a good time to remember that the VIX moves in the opposite direction of the stock market.)

Tuesday, the VIX closed at 26.54. What was significant, was that it closed above its 2016 triangular formation seen on the chart.

Since the VIX has made a series of three higher peaks since last November, the risk now is that it makes another higher peak in the coming days. That would be a real negative for the market, and therefore, the risk levels are elevated.

To see the chart, click here…

By Marty Chenard of StockTiming.com

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