HOW TO TRADE VOLATILITY: WHY THE BEARS MIGHT BE RIGHT ABOUT THE VIX!

September is typically a bearish month for the stock market and October has witnessed some of the biggest crashes and corrections in history. While most market pundits believe the trend remains strong for the market, it’s important to note the Nasdaq, S&P 500, and the Russell 2000 fell below their 50-day major moving averages last week.

With a possible Fed rate cut this month and 3Q earnings season just around the corner, overall market volatility has clearly heightened. Sentiment for the moment seems hesitant and why the volatility index (VIX) tested a four-year high on August 5th.

The chart below shows the VIX zooming to 65.73 last month as the major indexes suffered a minor selloff. For new investors, the VIX is a very short-term indicator that typically rises in bear markets and falls during bull markets.

Historically, the VIX has traded around the 20 level but spiked to 85 in March 2020 during the start of the coronavirus pandemic. When the market was trading at previous all-time highs to start 2020, the VIX was trading in the low teens and briefly in the single-digits.

One thing that has been fascinating to watch is that the VIX had not closed above 20 all year until August 2nd. In mid-April, the index tested an intraday high of 21.36 but still closed below 20.

In mid-July, we warned our subscribers of a possible near-term market top as a global computer glitch pushed the VIX to a low of 10.62 shortly after the open. The index zoomed to a high of 17.19 afterwards but closed above 15 for the second-straight session.

The start of September was bearish and represented the worst week for the market this year as the Nasdaq and the Russell both tanked 6%. The S&P fell over 5%. Going forward, it will be important for the bulls to get the VIX back below 17.50-15 and the 50-day and 200-day moving averages. Monday’s close below 20 was a start.

On the flip side, if the VIX closes above 24.50-25, there could be another round of panic selling.

For traders looking for action, one of the best ways to trade volatility is by using the iPath S&P 500 VIX Short-Term Futures (VXX). The July 52-week low reached 39.98 with the August 5th peak just north of 91.

It will be important the VXX holds 60-65 this month and ahead of the 3Q earnings season. If not, it would also confirm an ongoing market pullback, or correction, with risk towards 75-90. Support is at 50-45 and a rising 50-day moving average.