Of all the articles I write, the ones attracting the most spirited debate discuss the technical trades in my weekly newsletter EPIC Insights. Some traders believe that looking at charts to determine ideas is foolish while others believe charts offer the ability to predict the future.
Technical analysis is concerned with supply and demand in the marketplace. Using charts as the visual display of this data, technicians focus on actions that lead to further actions. By examining price history and volume data, we ignore what has caused an event and focus on the event itself. By studying charts, we emphasize the effect over the cause, eliminate confusion, and allow ourselves to predict the future path of prices.
With the aim of using charts to generates ideas, I am unveiling a new feature from EPIC Advisors—“The Chart of the Day”. Each day after the close, I will be presenting a current chart and discussing its investment implications.
Today’s chart is of the CBOE Volatility index (VIX). VIX is known as the fear index and increases in value when investors become nervous. As markets have rallied from the March low, VIX declined in a predictable channel (blue lines). Today that changed. VIX spiked higher and violated the existing downtrend. When a channel is violated, we expect the price to move the width of the channel. That would indicate VIX should move toward 37 over the coming weeks (blue box). As a rising VIX will keep stocks under pressure over the coming weeks, investors should consider the backdrop when making decisions.
If you are looking to profit from increased volatility, VIX options and various ETNs (VXZ, VXX) present direct relationships while short positions and inverse ETFs will benefit from declining markets that typically accompany an increase in volatility.