When we have confirmation that this period of record-setting low volatility is behind us, things are likely to once again get very interesting in the volatility space, writes Mike Golembesky, lead analyst on ElliottWaveTrader.net and specializes in coverage of U.S. Indices, including the VIX, plus Forex.
A week ago the VelocityShares Daily Inverse Short-Term VIX ETN (XIV) broke back over the previous all-time high of 96.91. This move came after the XIV experienced the largest corrective move since September 2016.
Although the previous highs were broken, the move up off of the August lows still has what can be viewed as an incomplete pattern. This potentially incomplete pattern is leaving the door open to several scenarios over the course of the next several weeks.
Back in July, I had written about how the CBOE Volatility Index (VIX) was setting some very impressive records in 2017. As of July the VIX had not only been trading in ultra-low price levels but in the frequency that these ultra-low price levels had occurred. This ultra-low volatility has now continued into August, September and even into the first few days of October.
Neither the new VIX methodology, which dates back to 2003, nor the old VIX methodology (VXO index), which dates back even further, have ever seen closings under the 10 level during the months of September or October.
This year the VIX closed under the 10 level six times in September and for all three days of October. The CBOE S&P 100 Volatility Index (VXO) closed under the 10 level sixteen times in September and also for all three days of October so far.
Even more impressive in my opinion is that the new VIX has seen a close under the 11 level in every single month of 2017, and the VXO has seen a close under the 10 level in every signal month of 2017. This frequency of low volatility is truly unprecedented and is not something that the market has even come close to occurring in at least the past 30 years.
I cannot say with certainty that these records will never be broken. I can say that I would be truly impressed if the VIX can manage to once again accomplish a feat like we have seen in 2017.
Price pattern sentiment indications
I would have preferred that the XIV make another low prior to breaking the 96.91 high.
The most imminent topping scenario that I had laid out previously is still technically valid and this scenario is shown in white on the charts.
With this continued move higher, however, I have now adopted the alternate path that is shown in green on the charts as my primary perspective at this time. This green path does suggest that the XIV does still have a bit more work to do prior to making a larger degree top but still should be near the final stages of this larger degree move.
Both of these paths (green and white) ultimately do lead towards seeing a move back under the August lows and potentially as deep as into the mid-40s. The big question is how much higher does the XIV have to go prior to making this larger degree top.
Under the green primary path, the XIV should still see at least one more fourth and fifth wave and potentially two more series of fourths and fifths prior to topping.
These series of fourth and fifth waves have the potential to move up into the 106 area and even as high as the 111 zone prior to topping as there are several Fibonacci price extension in those areas.
The XIV does, however, need to remain over the 90.75-87.80 zone to keep this green path probable. A break down below this zone would be the initial signal that we may have indeed made the larger degree top in the XIV. Further confirmation of this top would come with a break under the 85.06 level followed by the 76.19 level.
Unless and until those levels are broken, however, the pressure does remain up on the XIV in the near term.
Once we have confirmation that this period of record-setting low volatility is behind us, things are likely to once again get very interesting in the volatility space. Until then, however, I will simply stay nimble and continue to be on the lookout for tradable setups to take advantage of.