By: Ian Cooper
The hits just keep coming.
In late November 2018, the Dow Jones rocketed 617 points.
Days later, it fell 800 points.
Now, we’re down another 445 points to 24,582. All after Canada arrested the CFO of Chinese telecom company, Huawei. Canada's arrest, at the request of the U.S. has enraged China. Reportedly, he faces potential extradition to the U.S. China is now demanding that the U.S. "rectify wrongdoings" and free the CFO.
At the same time, oil is pulling back again after Saudi Arabia proposed a smaller than expected production cut at the OPEC meeting.
In short, it’s a mess out there.
However, as we noted the other day, it’s always best to protect against volatility. In fact, on November 21, 2018 and several times after, we suggested the following opportunities.
Velocity Shares Daily 2x VIX Short-Term ETN (TVIX), which traded at $38.88. It now trades at $51.63.
The iPath S&P 500 VIX Short-Term Futures (VXX), which traded at $34.54. It now trades at $34.54. It now trades at $39.25.
ProShares Ultra VIX Short-Term Futures (UVXY), which traded at $50.78. It now trades at $62.77.
We must also consider that volatility is getting a bit out of control.
How to Spot Pivots in Excessive Volatility
2018 will go down in history as one of the most volatile on record.
But believe it or not, one of the most consistent ways to make money on the market is by trading excessive fear, as dictated by the Volatility Index.
All we need to watch are agreements between Bollinger Bands (2,20) and Williams’ %R.
Bollinger Bands (2,20)
Remember, Bollinger Bands let us know how far we can pull our rubber band before it snaps back and reverts to mean. If we look at the VIX over the last two years for example, we can clearly see that once the upper Band is touched or penetrated, the VIX pulls back.
In fact, since early 2017, we’ve seen in happen dozens of times.
In February 2018, the VIX exploded to 50 but could not sustain that level outside the upper Bollinger Band. Not long after it pulled back. We saw the same thing happen at other VIX extremes in March 2018, June 2018, July 2018, October 2018 and in November 2018.
While it’d be nice to just use one technical indicator to tell us when to buy or sell, we know that’s never a safe gamble. So, we want to confirm our findings with another key indicator.
Williams’ %R (W%R)
When Williams moves to or above its -80, it’s an indication the asset is oversold. When it moves to or above the -20-line, it’s overbought.
Notice what happens when the upper Bollinger Band is hit or penetrated, as Williams’ %R pushed to or above its 20-line. It’s an indication of excessive fear, and a strong likelihood of a near-term reversal. In fact, about 80% of the time when the two confirm one another, we see a reversal in volatility and upside in the broader markets.
The question then becomes –how can we trade reversals in volatility?
There are two key ways.
One is the ProShares Short VIX Short-Term Futures (SVXY). The other is the VelocityShares Daily Inverse VIX ETN (ZIV). As volatility begins to reverse, these two opportunities typically turn higher.
It’s just another strategy to be well aware of when looking to take advantage of outrageous spikes in volatility.