The CBOE Volatility Index (VIX) Searching For Support

By Jim Donnelly, Olson Global Markets

After spiking sharply higher in April during a nearly 200-point 2nd quarter plunge in the S&P 500 Index, the CBOE Volatility Index (VIX) has since drifted back to much more tranquil levels. The decline in market volatility was accompanied by a more than 100-point recovery in the S&P 500 index, but a steady falloff in daily trading activity as well. Adding to this mixed view of the summer recovery’s strength was the continuation of net outflows from equity mutual funds and EFTS into bond funds.

Although it is impressive that the major equity indexes have been able to hold steady amidst such net outflows, the upcoming November elections will likely keep investors’ funds in safe places until the political landscape becomes a bit clearer. No doubt, the economy will face a number of unsettling headwinds no matter what happens in November. Among them include: unemployment levels; the housing market; taxes (both personal and corporate); the inflation/deflation debate; and international trade. Worries over the possible effects of another round of quantitative easing should remain a factor as well.

From a technical standpoint, the CBOE Volatility Index (VIX) appears to have more downside ahead of it, despite oversold conditions that currently exist. With the VIX closing just above the $22 level, it is important to note that primary trend line support currently sits at $16.75. In addition, there is “cross” trend line support now seen at $19, but this measure declines somewhat over time on weekly charts. Another month or two of pensive trading activity could well see this “cross” trend line and its primary support (which rises slightly over time) converge near $17 prior to the election. If reached, that level should represent a very attractive buying opportunity.

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