Volatility Spike Shocks Markets – Resets Trend Systems

The recent volatility spike in the VIX prompted a very quick downturn in price levels across all US major Indexes over the past few trading days this sharp decline, although only lasting four trading days, prompted many systems to warn of a potentially much deeper price correction. As of the close of trading on Friday, January 29, 2021, it looked like a deep correction in price was setting up. Our proprietary BAN Trader Pro system also generated a “trend reset” trigger on Friday. This means our systems expected a change in trend, suggesting a bearish price trend was setting up, based on this spike in volatility and what appeared to be a moderately deep price trend. 


The reality is that this downside trend move took place while a number of other factors were playing out. First, the Reddit group was targeting certain sectors/symbols in addition to the fact that the markets had already rallied a substantial amount since the November 2 election. This spike in the VIX index shocked a number of people and suggested a change in price trend.

The VIX Daily chart below highlights the recent upward spike and how it compared to the last upward price spike leading up to the November 2 elections. I urge you to pay attention to how the two spikes are different. The October VIX spike took place over 14+ trading days and resulted in a peak level above 40. The current VIX spike took place over 5+ days and peaked near 38. Although the peak levels are similar, the breadth of this recent VIX spike was completely different – shorter and more immediate.

Historically, any VIX move above 35 is typically associated with a 6.5% to 11% downside price swing. Over the past 4+ years, any VIX move above 30 is typically associated with a more defined downside price rotation but not a deep price correction, rather a moderate downside price rotation at the very least. This time, the VIX spiked above 35 very quickly, over the course of 48 hours, then began to move substantially lower very early on Monday, February 1, 2021. This type of price rotation shocked the markets and many traders because we had not seen anything this volatile and short-lived in quite a while.

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