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VIX Continues to Be Short Trade of Choice

With its volatile spikes, being patient and waiting for the short trade has paid off since the start of 2013 as the volatility index has failed to gain traction on the upside.

The sharp price rises have been followed by even sharper sell-offs. There will come a time when the VIX will trend higher, when major indexes such as the S&P 500 enter sustained downtrends. Until that occurs though, waiting for spikes in the VIX and then selling it expecting a correction back lower remains the play.

In 2013 the level to watch was 20. A rally above that followed a correction back below on a strong down day usually signaled the buying was over and a correction back to the 14 to 13 region was forthcoming.

Figure 1. CBOE Volatility Index (VX )


Smaller spikes jumped to between 17 and 18, and indicated the same thing as above, except the profit potential was a bit smaller.

The recent spike in August 2014 took the VIX into this region, and once again a strong selling day after reaching area indicated the buying was likely over and a move lower probable.

Given the historical precedent and the lower spike high in August (relative to the February 2014 spike high), the VIX could continue to fall toward 13 or even 12.

Below 12 is rarified space; don't expect VIX to remain below 12 for long if it does drop below this level. While it goes against the overall trend, this is the place to look for longs for those expecting a correction in major indexes. For the past few years, even moves below 13 were typically short-lived.

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