Authored by Sven Henrich via NorthmanTrader.com,
Volatility remains historically low, but have you noticed the rising tide? Volatility has been rising even as markets have been making new highs. We’ve seen this before in the mid 90’s so it may not necessarily be a bad thing for markets. Or it may mean a lot.
After all the entire advance since the February 2016 lows has been accompanied by volatility compression. The $VIX has remained in its well defined descending wedge pattern which I have posted frequently on twitter:
In 2017 these recent market highs would’ve produced $VIX readings in the 9-10 range. Not in 2018 so far. This and last week we saw consistent closes above the 200MA. That’s a notable change as all spikes above the 200MA in 2017 were sold.
While markets continue to bounce off of the daily 5 EMA and 15 min oversold readings one can so far only imagine what $VIX would do during an actual corrective move in markets.
For that we have some history to consult.
Here’s a historical $VIX weekly chart:
Volatility as we know has been historically compressed. The descending wedge pattern continues to scream for an eventual break of its bondage and we’ve seen similar patterns before all producing spikes higher. The exception here is that this current pattern is steeper and much more compressed.
All previous pattern have produced at least sudden spikes into the 20s followed by a reversal before eventual moves into the 40s, 50s or above.
A quarterly view adds additional flavor:
These are long terms patterns and clearly fans of volatility have been benched waiting for a breakout.
But this is a new year and despite new market highs we an observe: Volatility is rising.
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