There are many indexes on the market.
There are stock indexes… consumer price indexes… commodity indexes…
There’s even a happiness index! It’s published by the United Nations. The last one was in 2019. It found that Finland was the happiest country in the world. Who’d have thought?
But there’s another type of index that’s designed not to measure happiness. Instead, it measures fear… investors’ fear.
And it’s one of the most important indexes there is. In fact, every investor should follow it…
Understanding the Market’s “Fear Gauge”
You’ve probably heard of this index before. It’s called the Volatility Index, or VIX.
It’s the stock market’s very own fear gauge.
The VIX is a real-time market index. It shows us the market’s expectations for volatility over the next 30 days.
Put in very simple terms, the higher the number on the VIX, the higher the degree of fear in the stock market.
But what a lot of people don’t know is that the VIX has many different applications.
Investors may analyze the VIX to try and time a stock purchase. Sophisticated traders may want to buy or sell options on the VIX itself.
But one thing that everyone who looks at the VIX has in common is this: They all want to figure out whether the index will go up or down.
So how do they do that?
Most traders will look at the underlying market fundamentals to try and determine the level of fear in the markets. But what many traders don’t realize is that technical analysis can also be a very effective tool in anticipating the market’s fear.
Think of it this way…
Technical analysis attempts to forecast the future using information from the past.
The information that technical analysis examines is price action. Price action is the collective behavior of all market participants plotted out in lines on a chart.
The VIX is no different from any other chart. It also has price action. So you can use technical analysis to figure out how it might move next… just as you would with a stock.
Look at this chart of the VIX…
Since the start of the year, we’ve seen three compressing and falling wedges on the VIX. These are marked 1, 2, and 3 on the chart.
You can see that each time the wedge finished forming, volatility went up right after.
However, despite all the volatility we’ve seen in recent weeks, we have yet to reach the all-time high of 96.40, set in October 2008.
But take one last look at the chart above.
As you can see on the far right, we have another pattern in the price action that looks eerily similar to the previous three wedges this year… And this next wedge just broke out higher.
It will be interesting to see how this one plays out. It could be the signal that takes us back to that 96.40 level – or perhaps even higher.
Andy Krieger and Imre Gams
Editors, Money Trends
Here’s what Andy Krieger’s Big Trades subscribers are saying…
Dear Andy, I understand that your expertise is in forex, and in particular, the major currency pairs. As you have forecasted, there will probably be big trades in other markets (stocks, gold, bitcoin, etc.).
I appreciate your view of the macro economy and the current trade signals in forex, even though it’s been a rather volatile currency market at the moment.
– Chi T.
Loving getting back into forex. I used to trade price action 10 years ago or so on International Accounts. I had a high-risk/crazy friend telling me what to trade, so it worked out most of the time.
Now that I’m studying this again and learning from your stuff, it makes me feel great, because I think the same way on a lot of it. Thanks so much 🙂
– Jeff L.
Do you have questions or comments for Andy and Imre? We’d love to hear from you… Write us at [email protected].