The VIX, or Volatility Index, is a futures contract listed on the Chicago Mercantile Exchange that the exchange has effectively marketed as the Fear Index. This is due to its inverse correlation with equity indices. When equity markets fall sharply, the VIX typically rises decisively.
Technically, although the specifics are not essential to understand, it represents the average implied volatility of all S and P 500 put and call options expiring in the next thirty days. The higher its value, the higher the premium that dealers require to sell protection or hedges.
Since the VIX is a futures contract, although CFDs linked to it can also be traded, it has an expiration date on the third Tuesday of every month. This matters because on that day the rollover takes place, meaning the switch from the current contract to the next one. This transition usually results in a price gap.
Until a few years ago, specifically before the Covid crisis in 2020, levels near 20 signaled a degree of market tension and nervousness. However, if you look at the longer term chart, you will notice that since mid 2024 it has hovered around similar levels without this preventing equity markets from remaining in bullish territory.
Technical Analysis
As an index that moves only between zero and one hundred, and which approached the upper boundary only during the Global Financial Crisis, the VIX does not follow a classic trend. Instead, it oscillates around static zones worth monitoring. Over the past two years, the 13 to 14.50 zone has been its lower trading range, while 16 to 17.25 can still be considered relatively low. Following equity market pullbacks, it may rise toward the 22 area and occasionally overshoot into 27.50, or even 37.50 to 40 during periods of panic. It is important to remember that the VIX tends to spike upward rapidly and decline more slowly.
At the beginning of September, the VIX was trading at 15.30 and briefly climbed to 28 after the announcement on Friday, October 10, regarding renewed tensions with China on tariff agreements. Since then, it has quickly fallen back toward 17.75 and has remained over the past month between that level and 22.
This morning it is edging slightly lower and is currently trading at 19.51. It is worth monitoring, because a further increase could coincide with a breakdown of the 50 day moving average on the S and P 500. If that occurs, a rapid move toward the 25 to 27 area could follow. Remember also that tomorrow is rollover day, which will generate a price gap.
