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Trading  | May 23, 2018

Authored by Sven Henrich via,

I received a lot of questions on yesterday’s Charts that make you go: Hmmmm. That’ll teach me to post charts without commentary …

Hence let me offer some perspective on some of these charts and I want to hone in specifically on volatility, or rather the great dying we’ve just witnessed. In the most recent weeks all fear appears to have left markets again and volatility has compressed to tight intra-day ranges such as we are witnessing today. All this action is rather reminiscent of the low volatility regime market participants had become accustomed to during the artificial liquidity bonanza of 2017.

Are we heading there again and the regular buy every dingle dip mantra takes over again? Or are we rather in the center of a larger storm, witnessing a temporary reprieve from the wily winds of volatility ready to strike again?

Firstly some basic perspective.

We remain in the middle of the range we have seen for the past few months:

Perhaps ironic that volatility and fear has again subsided despite broader markets not showing significant progress from these earlier consolidation phases in the same price ranges.

But perhaps more notable is that this current volatility compression is coming at a very particular technical pivot point:

The chart above shows a long term chart of the $VXO, the original formula of the $VIX. Here we can see a multi year descending trend line that has shown to be precise resistance between 2015 and 2017 and even during its first tag in 2018. The February correction subsequently saw a massive volatility spike breaking above that trend line and $VXO has remained above the trend line throughout.

Technically speaking, for bulls to find comfort in volatility resuming its 2017 type program it needs to break below this trend line. As it is support for now it opens up the possibility that this current volatility compression is a simple technical retest that could result in a major spike yet to come.

Something like this:

Hence volatility is at a major technical crossroad here with neither side having yet proven their case.

And both bullish and bearish considerations have their merit.

On the bullish side one can make the case that price has broken above its recent descending trend line on $SPX and the 100MA has been successfully defended opening the path to higher prices:

But note, that the most recent volatility patterns are forming potential descending wedges. These are bullish patterns if $VIX breaks out above.

And if that happens, the bearish interpretation of the $SPX chart could take control targeting a potential retest or even break of February lows:

This chart argues that the February 2016 support trend line has broken and remains broken and $SPX is rather engaged in a larger bear flag pattern. And if volatility spikes and $SPX confirms this bear flag pattern a much wider lower risk range potentially opens up on $ES:

The structures of the above volatility charts suggest that markets will make up their minds in the near term.

For now things are quiet. Perhaps too quiet.

*  *  *

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