With the amount of uncertainty in the financial markets, market sentiment plays a very crucial role in determining where the big money is positioned and what type of market gyrations to expect in the near term.
The VIX represents a real-time index of the market's expectations for the relative strength of near-term price changes of the S&P 500 index. Likewise, the VXN represents an index of the market's expectations for the relative strength of near-term price changes of the NASDAQ 100. Because they are both derived from the prices of SPX and NASDAQ index options with near-term expiration dates, they generate a 30-day forward projection of volatility. Volatility is often seen as a way to gauge market sentiment, and in particular the degree of uncertainty among market participants. The way to gauge a daily range is by the following:
Expected Daily Move in Stock/Index: IV/sqrt(256 trading days) or 16 = Expected % Daily Range.
E.g. SPX 30d IV = 23.85;
23.85/16 = 1.49% expected daily range for the next 30d.
VIX (S&P 500)
Taking a look at the VIX candle chart, the price action has made an inverted hammer pattern right off the 200p SMA. Historically, the past three times it has done so it tends to bounce right off of that to make new highs.
The VIX is continuing to make higher lows while continuing to display a wide volatility range.
Point and Figure charts which display objective price action without noise, and just measure price and volatility without regards to time have been very accurate in their price targets. Most recently price hit the upside target of 36 and the downside target of 25. We've continued to remain in a high range between 15-35 over the past year.
VXN (NASDAQ 100)
The VXN which tracks the volatility of the NASDAQ 100 also like its counterpart has seen a high range of volatility. Currently its basing out in between the 20p and 200p SMAs which is considered a trap zone.s
Price and Volatility have started to converge while the VXN continues to make higher lows.
On the Point and Figure charts the price action has currently made a cup with a wide range from 18-40 within the year. The Price action is currently hovering over the right side of the cup for which every time it has done that, volatility in the NASDAQ 100 has risen.
Overall, these are very volatile times with plenty of catalysts that can cause extreme uncertainty at any time. Having a key understanding how the range of moves that can be made in the overall indices and individual names can give very good guidance to traders and investors in which strategies to deploy.