Keep an eye on the Volatility Index (VIX).
While this may sound odd to some, it’s far too calm at 17.25. Historically, when it’s this eerily calm and as oversold as it is on relative strength (RSI), Bollinger Bands, Full Stochastics, and Williams’ %R, chaos ensues not long after.
While we hope we’re wrong, we’re using history as our guide here.
For example, look at a two-year chart of the VIX with those very technical indicators
For one, when the VIX challenges or penetrates its upper Bollinger Band, it’s considered overbought, and begins to pivot lower shortly after.
Two, we can confirm the VIX is overbought with RSI at or above its 70-line. Three, we can confirm its overbought again with Full STO at or near its 80-line. Four, we can confirm further with W%R at or above its 20-line.
When these four indicators agree in overbought territory, about 80% of the time, the VIX will often pivot lower. When that happens, we’ll typically see a rebound in the Dow too, which we can profit from using a DIA call for example.
We’re seeing this play out again – increasing the odds of volatility and downturn.
While you can always pick up put options on the major indices, another way to prep for potential chaos is with:
Pro Shares Ultra VIX Short-Term Futures ETF (UVXY)
As the VIX pops, so does the UVXY ETF.
The Volatility Index and the UVXY ETF could see higher highs. All thanks to uncertainty about what could possibly happen next. For those of you that are new to the UVXY, the ETF was designed to match two times (2x) the daily performance of the S&P 500 VIX Short-Term Futures Index. As the VIX moves higher, the UVXY typically follows.
iPath S&P 500 VIX Short-Term Futures (VXX)
The VXX ETN provides exposure to the S&P 500 VIX Short-Term Futures Index.
ProShares VIX Short-Term Futures ETF (VIXY)
ProShares VIX Short-Term Futures ETF provides long exposure to the S&P 500 VIX Short-Term Futures Index, which measures the returns of a portfolio of monthly VIX futures contracts with a weighted average of one month to expiration.