VIX Unable To Hold Rallies, But At Lower Bound Of Dual Trend-Line Support

Volatility bulls have not been able to sustain rallies. Amidst this, non-commercials have been quietly reducing net shorts in VIX futures. If the past is any guide, VIX does not peak until these traders go net long or get close (VIX).

Non-commercials have been quietly cutting back their net short exposure to VIX futures. As of last Tuesday, they held 62,240 contracts, down from 163,238 in the week to February 16. Back then, holdings were at a 56-week high, now they are at a 48-week low.

Leading up to that, VIX did spike to 37.51 on January 29 last year before reversing lower. Incidentally, this was yet another low since surging to 85.47 in March last year.

Historically, VIX has shown a tendency to peaking once these traders go net long or get close. In Chart 1, arrows point to three such instances. This time around, the short covering by these traders has not resulted in sustained upward pressure on volatility. Rally attempts keep getting sold. The cash is yet to even break a 14-month downtrend, let alone post a higher high.

It is possible VIX is in the process of doing exactly that. Arguably, non-commercials could be anticipating this, hence are reducing their net short exposure.

Right here and now, volatility bulls have their backs against the wall. Their most recent rally attempt stopped on the 13th this month after ticking 28.93. Even last Wednesday, VIX tagged 25.96 intraday but only to reverse sharply lower to close at 22.18; by Friday close, VIX sat right on 20 support. A breach exposes the index to risks of mid- to high-teens. This is near term.

The medium-term outlook is different.

In November 2017, VIX made an all-time low of 8.56. A rising trend line off of that was just defended. In fact, the volatility index is currently hovering near that support, which also lines up with the lower bound of a 15-month falling channel. If the upper bound is tested, we are talking mid-30s, and mid-40s if the other channel is tested (Chart 2).

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