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What's the Long Term Trend of the VIX Saying?

Remember the old story of the "Three blind men and the elephant"?

In the tale, each man touches a different part of the elephant and think it is something different. One thinks its a snake, another a tree, and the versions of this story carry on. But, what is the same is that all three disagree with each other and are in conflict.

All of that could have been resolved if someone with eyesight had showed up and had seen the elephant from a far enough distance to know that it was in fact an elephant.

We are all lucky because we have eyesight. But, all to often in trading, we don't stand back far enough to see the "whole animal" or "whole picture".

Take the VIX Index for instance. Most investors and technicians simply look at the "close up" story of what it is saying. Thus, they have different opinions and are often in conflict. That "close up" view is seen in our first chart below, and the larger "whole picture" is seen in the second chart.

Chart 1: This is the "close up" view where one can see that the VIX has an expanding wedge pattern, and the S&P 500 also has an expanding wedge pattern, although not as pronounced.

See the next chart ...

S&P500 and VIX Daily Chart

Chart 2: It isn't until you step back far enough that you can see the larger picture of what the VIX is saying for the longer term.

There are two things to note in this longer term view. One, I have drawn a "circle" which defines the support for the VIX as it travels through time. In years past, I have shown this same pattern and it has repeated.

The implications of the circle, is that the support will rise over time, which will reflect a market that gets more volatile and riskier.

The second thing to notice are the rising fan lines. They keep rising higher which suggest that they will continue to do so in the future until the whole process reverses with declining fan lines.

What's the message here?

The message is to be sure and also look at charts with longer time periods so you can see the longer term trend changes and implications.

The implied implications coming from this chart, are that troublesome times are in the not too distant future which means that investors should avoid investment strategies that focus only on "long term" returns.

VIX

 

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