OVI Highlights – VIX at 5-Year Low

VIX at 5-Year Low

The VIX (Chicago Board Options Exchange Market Volatility Index) is a measure of the implied volatility of the S&P 500 index options.  It represents one measure of the market’s expectation of stock market volatility over the next 30 day period. 

Options volatility is driven by the expectations of options market makers.  When steady rising prices are anticipated, options will be priced lower (lower volatility).  When prices are expected to be unpredictable or falling, options will be priced higher (higher volatility).  Think of them a bit like an insurance premium.  

On the face of it, when the VIX is low, it suggests higher prices to come, and when it’s high, it suggests lower prices to come.  

However, the VIX is also often considered a contrarian indicator whereby extremes may be a prelude to an imminent reversal.  

Right now we are at 5-year lows for the VIX, which may have some investors nervous about a disappointing earnings season.  This is not a reason to suddenly now make a judgement or opinion.  The VIX could get even lower, and the markets could continue to rise.  

Our job is to trade what we see.  Right now there are Doji high bars around, but they don’t look particularly menacing to me … not yet at least.  The OVI is steady and positive on the indices and the chart patterns if anything look to be suggesting an upside breakout.  

When the market is bullish, this is a good time to use our CAN SLIM and CAN SLIM LITE filters, and look for bullish chart patterns and positive OVIs combined.  This way you get the combination of positive fundamentals, technicals and transactions all in one hit. 

This week in just a few seconds I found three that looked interesting because they were forming bull flags and had positive OVI readings for at least a few days.  SXL, UHS and TV.  None of them have great volume, and to be fair, the OVI readings weren’t what I would call stellar, but they weren’t anything to worry about either.  SXL duly broke perfectly from its bull flag in the last couple of hours on Friday, meaning it’s now time to protect my profits. 

 
All the best

Guy