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Chris Vermeulen

Chris Vermeulen

Chris Vermeulen, founder of AlgoTrades Systems., is an internationally recognized market technical analyst and trader. Involved in the markets since 1997.

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ATP VIX Cycle setting up for “Deja Vu”... again?

On June 11th, we posted a very detailed article indicating our analysis predicted a a NASDAQ market selloff as well as a VIX SPIKE potential on, or near, June 9th or 12th and June 29th.  This research was actually completed June 7th by our research team – it was just posted on the 11th to our ATP members.  On June 30th, we posted a follow-up article highlighting our predictions and showing how accurate our analysis had been.

Today, we are revisiting this topic to make another prediction.  This time, we will expand our analysis a bit further and attempt to explain why we believe the next few VIX cycle events may be setting up for something massive.  

The two predictions we've already made were for June 9th or 12th and for June 29th to present a potential spike in the VIX and to see increased volatility in the markets.  First, lets take a look at those two signals and review them a bit.  Before we get into the analysis, though, we want to make sure you understand how our analysis of these cycles is displayed on the charts.  There are actually two levels we are focused on : Pre-Event Cycles and Volatility Cycle Events.  Pre-Event Cycles are setups, price rotation, that will likely precede the VIX/Volatility spikes.  Depending on what market price is doing between these Pre-Event Cycles and the Volatility Cycle Event, we can attempt to determine how valid or extensive the VIX spikes may be. 

In the chart, below, the Volatility Cycle Events are highlighted with RED ARROWS.  The Pre-Event Cycles are highlighted with YELLOW ARROWS.  Notice how the Pre-Event Cycles are setting up, roughly, 7 days prior to the major event cycle.  We would typically watch for a recent new high or low to form near or after the Pre-Event Cycle as a warning that the Volatility Event Cycle could be an explosive retracement or explosive breakout trend move.  These PRE and POST cycle structures allow us to better understand price movement, rotation, volatility and setups as the cycle events are happening/forming.

Now, onto our past triggers and how they setup and worked out.  Both of our earlier VIX Spike calls were based on the chart you are seeing above.  This is not rocket science, folks.  It is just good old cycle and technical analysis with a bit of luck sprinkled in.  You can see our prediction of “the 9th or 12th” was actually perfect in the sense that the US Fed announced a rate increase early on June 9th and the market tanked.  Our June 29th prediction was due more to luck than cycle accuracy.  One has to remember these cycles do not operate like time on a clock – exact dates/times.  These are more like guides that indicate something should happen “near these dates/times”.  So, even though the cycle marker is on June 28th, our analysis team predicted June 29th would be the day the VIX would spike – and we were right.  But consider this for a moment, we could have issued the warning as “near June 29th” and we still would have been correct.  Now, lets take a look at the raw VIX and VXX charts that are driving all of this analysis.

Although these charts may be a bit confusing to some people, they tell our research team quite a bit.  For example, future volatility cycle events are likely near July 19th, Aug 4th, Aug 23rd, Sept 11th or 12th and finally Sept 28th or 29th.  It is our interpretation that the more likely the VIX is able to base below the $11 level prior to a potential VIX Cycle Event, the more likely we are to see some level of explosive move from these constricted volatility levels.  Although, we can't accurately predict the size and volatility of the swings in the VIX chart, we attempt to gauge these moves using a simple formula.

NASDAQ projected volatility (base level) = (Size of Vix Spike (from base)) / 3

Expected Volatility Range = (NASDAQ projected volatility / 2.85) ~ (NASDAQ projected volatility / 3.5)

In the most recent example, the VIX spike was a total increase of 52% from the base levels (lowest levels). 

52 / 3 = 17.33  (Expected NQ volatility base)

Real NQ expected volatility range =

17.33 / 2.85 = 5.17%

or

17.33 / 3.5 = 4.21%

On July 3rd, between the Pre-Event Cycle (June 21st) and the price rotational low (July 3rd), after the Cycle Event, the NQ rotated a total of 293 pts – or 5.02%.

These numbers are not rocket science, again.  This is just practiced study of price activity and rotation. 

So, what should we expect in with the future Cycle Events?  We've already given you most of the blueprint for understanding how these work and how they relate to price activity.  Now, the trick is to understand how the cycle events relate to one another and, then, attempting to make educated predictions with regards to future events.

This last chart will help you understand how to gauge and judge potential volatility ranges by determining the range of recent price action on the NQ chart.  Notice the range in price recently (roughly 268 pts : 4.65%).  If volatility relates to a full range price rotation, then the VIX will likely spike in size relative to our formulas – approximately 50~70% from base levels.  If the volatility spike results in much larger price moves (beyond the recent price ranges), then we could expect the VIX to spike well beyond 70% (possibly well beyond 100%+++).  It all depends on the fear and level of capital rotation in the markets.  At this point, a safe number is somewhere between 3~5% for the NQ if this range continues to be a future price boundary.

With regards to future VIX spike predictions, we will add only one more item for you to consider.  As the VIX levels on our charts continue to consolidate towards the pinnacle (near Oct 12th), expect more volatile and more explosive price rotations in the market.  The fact that this type of cycle analysis predicts a potential spike near Sept 11 should not be overlooked.  We are not saying anything will happen on this date (with any level of accuracy), but we certainly would not discount this date and it's importance at this key juncture in the markets.  So, be advised that these dates may well present fantastic trading opportunities for smart investors/traders.

By Chris Vermeulen

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