Over the past few months, the VIX has been extremely elevated and price action has been downright horrid. In this article, I’m breaking down what volatility and price action are telling us.

Volatility remains stubbornly high

You can blame the very sharp moves in the markets on elevated volatility. The VIX, or the fear gauge, has spent a generous amount of time above the 30% area. In fact, over the last 20 periods, the index has stayed above 30% for all but five sessions. This is significant, especially when you realize the VIX historically trends lower (with the occasional bounce to scare everyone).

This elevated condition has created a quandary for market participants. Even with big moves back and forth, volatility has held steady.

Again, this is remarkable, because a 30% VIX represents an approximately 2% daily move in the markets. For the SPX at 3770, a 2% move means an implied or expected of 75 points each day. These big moves have been happening a lot lately. On October 13, the SPX futures started up 44 points before dropping down 80 points and bouncing back up 108. Whew! Meanwhile, the VIX barely moved.

So, why is the VIX not moving much with the markets these days? The best explanation is that the big money has purchased index puts as insurance and they are not in the market to buy more. They are holding that protection, not selling it – which is an important point in looking at the lack of VIX movement vs the price action.

Price action is facing steep resistance

Price action has been downright nasty. Since the start of the fall trading season, new lows have been made, breaking the June lows. While we ended last week much higher than those lows (3650 or so), plenty of resistance remains ahead. As a result, even promising price moves up will suddenly halt.

Days like last Monday and Friday have the bulls hungry for more upside. Some believe that their will can overcome the long-standing bear market. It’s not that easy of course, and as we like to say, “You don’t tell the markets what to do.” But I see some potential upside to the 50 ma around 3880. It could happen very quickly – this week even. But after that, we’ll be looking for some more downside, especially if the VIX remains stubbornly high.

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