As you may know, the CBOE Volatility Index is nicknamed the VIX. What you may not know, is that we might potentially be seeing a VIXplosion sometime soon, reports CNBC.
Are Things Too Good To Be True?
Right now, stocks are day trading at all-time highs. This means that fear of a crash is down. Like stocks, the Bitcoin Evolution has made digital coins anoother asset to consider trading with. However, the VIX is an index created by the Chicago Board Options Exchange that predicts 3-day volatility. Essentially, it’s a visual representation of the fear within the market. And, according to Sven Henrich, the head market strategist and founder of NorthmanTrader, things might be fearful sometime soon.
Speaking to the publication’s “Trading Nation” show on Friday, Henrich says that “the VIX follows some very specific patterns that show compression. If you look back to, let’s say, the last few years, we’ve seen a large compression pattern from 2016 to 2017.”
The strategist thinks that all of this success, or “energy” as he calls it, might soon blow up. It’s all compressed between a group of lower highs and lower lows that occur within the VIX over a period of time. “When that energy compresses too much, then we see these spikes. We have seen these spikes with quite a bit of regularity, but they always need some sort of trigger, and perhaps the Fed may be the trigger next week.”
Of course, Henrich is referring to the Federal Reserve’s decision to cut interest rates or not in preparation for a trade war between the United States and China. No decision has been made just yet, but the Reserve is doing what it can to prepare.
Moreover, the founder isn’t sure if investors are ready for August. According to him, this month is quite often the weakest month of the year regarding trading volumes:
”[I] see a lot of complacency right now. This week we had news of antitrust investigations for Nasdaq. What’d the Nasdaq do? Made new all-time highs. It’s not pricing in any bad news whatsoever.”
The VIX graph is getting narrower and narrower, which may cause it to eventually pop, claims the strategist:
“It’s compressing tighter and tighter, and it’s building up this pattern. So, it’s ready for another breakout. The question is the when and the how.”