RECESSION IMPENDING?-MEDIUM TERM VOLATILITY VIX|PREMIUM ANALYSIS
Updated
VIX: Volatility Index-Extension to the US (SPX) Sectors Technical Analysis Series - 17th of August 2019 (9 Minute Read)
As it can be observed from the chart, this is an extremely complex(Premium) volatility analysis. The purpose of this chart is to evaluate the probability and the timing of the next recession in the short to medium term.
Now, let's breakdown the labels of the chart by starting with the structural build up. The purple horizontal line at the bottom(~8.6) signifies the peak of the cycle and the lowest level of volatility. The same trough in volatility can be noticed in both 2006 and the end of 2017. This is significant because, the first signs of weaknesses in the economy were noticed a year after the peak- in 2007 and 2018, respectively.
Since the correction in 2018, the VIX has been building an Ascending Bullish Triangle; that is currently on D. The top of the channel coincides with previous peaks of around~50(labelled with blue). A breakout confirmation of the Ascending Triangle, would be if the VIX closes above the Ichimoku cloud at ~30(the black line). At the same time, the meaning of this breakout will signify the onset of the next recession.
Zoomed in chart, showing the Ascending Triangle:
There are 3 Fibonacci Indicators that are used in the chart and 1 pitchfork based on the ascending triangle. The Pitchfork and the vertical Fibonacci time frames are used as clues for the timing of the peak of volatility in the upcoming periods. The significance of the Fibonacci Spiral is linked with the breakout of volatility of the Ascending Triangle and a formation of a new equilibrium(by Fib Extension).
Beyond Technical Analysis- Applying context to my work: In May I posted my first Wave Analysis of the SPX(#2 Link Reference down below). It predicts that a recession is impending around Q4 2019/ Q1 2020. Since then there have been several factors (including the Ascending Triangle in the VIX) that have intensified the fears of a recession in the near term. Just so I do not repeat myself; some of these factors I analysed in my series about the US SPX Sectors(Link #1, Series Finale Episode #11-XLU). The recent Yield Curve Inversions(Link #3) is somewhat significant and very contributing factor that estimates a recession within 3-5 quarters of the occurrence of the inversion. This is based on my extensive readings on the literature on US yield curve inversions.
Finally! The question that needs an immediate answer- Will there be a recession in the near term?
- The annoying answer is that, there is a high probability. What do I think? - We have certainly talked ourselves and formed expectations of a recession. This is quite unnatural. To the general public and the average investor, recessions are usually very unexpected(best and most recent example are the recessions of 2008/2001).
In a Binomial Probability Model: The most contributing factor for the current recession fears, that could reverse the fearful feelings, revitalize the economy and bring back confidence to the market would be a successful US-China Trade deal. Such deal in addition to an optimal outcome to the 2020 Election, would extend the cycle even further. In the most bullish case with a Trade Deal the VIX would continue to trade in a short range and break-off from the ascending triangle pattern. I am quite optimistic that a deal will eventually happen, otherwise President Trump will not win 2020 and a recession will be inevitable by 2021. Of course, we all know that Trump would do anything to win the next elections.
>>I do not share my ideas for the likes or the views. This channel is only dedicated to well informed research and other noteworthy and interesting market stories.>>
However, if you'd like to support me and get informed in the greatest of details, every thumbs up or follow is greatly appreciated!
I do realize that my charts are quite hard to be understood, mostly because they are labelled to the smallest and extremest of details. If there are any poor understandings of the labels, I'd be able to answer any additional questions in the comments.
Step_Ahead_oftheMarket-
{Make sure to check out my previous series on US( SPX ) Sector including 11 episodes of the major US sectors}
1. Series Finale; Episode 11: US Utilities(XLU) tradingview.com/chart/XLU/B0BlK6dE-US-SECTOR-SERIES-FINALE-11-11-UTILITIES-XLU-ESSENTIAL-TA-NOTES/
2. SPX Elliott Wave Analysis of the current Cycle: tradingview.com/chart/SPX500USD/HHdPeFOu-End-of-2019-Start-of-2020-SPX-crash/
3. US T. Bonds Yield Curve Inversion 3 months to 5/10 years: tradingview.com/chart/US03MY/VBxIFKxL-Yield-curve-inversion-Projecting-a-recession-in-3-5-quarters/
Full Disclosure: This is just an opinion, you decide what to do with your own money. For any further references or use of my content for private or corporate purposes- contact me through any of my social media channels.
As it can be observed from the chart, this is an extremely complex(Premium) volatility analysis. The purpose of this chart is to evaluate the probability and the timing of the next recession in the short to medium term.
Now, let's breakdown the labels of the chart by starting with the structural build up. The purple horizontal line at the bottom(~8.6) signifies the peak of the cycle and the lowest level of volatility. The same trough in volatility can be noticed in both 2006 and the end of 2017. This is significant because, the first signs of weaknesses in the economy were noticed a year after the peak- in 2007 and 2018, respectively.
Since the correction in 2018, the VIX has been building an Ascending Bullish Triangle; that is currently on D. The top of the channel coincides with previous peaks of around~50(labelled with blue). A breakout confirmation of the Ascending Triangle, would be if the VIX closes above the Ichimoku cloud at ~30(the black line). At the same time, the meaning of this breakout will signify the onset of the next recession.
Zoomed in chart, showing the Ascending Triangle:
There are 3 Fibonacci Indicators that are used in the chart and 1 pitchfork based on the ascending triangle. The Pitchfork and the vertical Fibonacci time frames are used as clues for the timing of the peak of volatility in the upcoming periods. The significance of the Fibonacci Spiral is linked with the breakout of volatility of the Ascending Triangle and a formation of a new equilibrium(by Fib Extension).
Beyond Technical Analysis- Applying context to my work: In May I posted my first Wave Analysis of the SPX(#2 Link Reference down below). It predicts that a recession is impending around Q4 2019/ Q1 2020. Since then there have been several factors (including the Ascending Triangle in the VIX) that have intensified the fears of a recession in the near term. Just so I do not repeat myself; some of these factors I analysed in my series about the US SPX Sectors(Link #1, Series Finale Episode #11-XLU). The recent Yield Curve Inversions(Link #3) is somewhat significant and very contributing factor that estimates a recession within 3-5 quarters of the occurrence of the inversion. This is based on my extensive readings on the literature on US yield curve inversions.
Finally! The question that needs an immediate answer- Will there be a recession in the near term?
- The annoying answer is that, there is a high probability. What do I think? - We have certainly talked ourselves and formed expectations of a recession. This is quite unnatural. To the general public and the average investor, recessions are usually very unexpected(best and most recent example are the recessions of 2008/2001).
In a Binomial Probability Model: The most contributing factor for the current recession fears, that could reverse the fearful feelings, revitalize the economy and bring back confidence to the market would be a successful US-China Trade deal. Such deal in addition to an optimal outcome to the 2020 Election, would extend the cycle even further. In the most bullish case with a Trade Deal the VIX would continue to trade in a short range and break-off from the ascending triangle pattern. I am quite optimistic that a deal will eventually happen, otherwise President Trump will not win 2020 and a recession will be inevitable by 2021. Of course, we all know that Trump would do anything to win the next elections.
>>I do not share my ideas for the likes or the views. This channel is only dedicated to well informed research and other noteworthy and interesting market stories.>>
However, if you'd like to support me and get informed in the greatest of details, every thumbs up or follow is greatly appreciated!
I do realize that my charts are quite hard to be understood, mostly because they are labelled to the smallest and extremest of details. If there are any poor understandings of the labels, I'd be able to answer any additional questions in the comments.
Step_Ahead_oftheMarket-
{Make sure to check out my previous series on US( SPX ) Sector including 11 episodes of the major US sectors}
1. Series Finale; Episode 11: US Utilities(XLU) tradingview.com/chart/XLU/B0BlK6dE-US-SECTOR-SERIES-FINALE-11-11-UTILITIES-XLU-ESSENTIAL-TA-NOTES/
2. SPX Elliott Wave Analysis of the current Cycle: tradingview.com/chart/SPX500USD/HHdPeFOu-End-of-2019-Start-of-2020-SPX-crash/
3. US T. Bonds Yield Curve Inversion 3 months to 5/10 years: tradingview.com/chart/US03MY/VBxIFKxL-Yield-curve-inversion-Projecting-a-recession-in-3-5-quarters/
Full Disclosure: This is just an opinion, you decide what to do with your own money. For any further references or use of my content for private or corporate purposes- contact me through any of my social media channels.
Note
VIX Monthly MACD. Implying increased probability of a recession (>0).
James Bullard implications of "Perma-Zero" rates on volatility might become the new norm in the future.
Note
VIX Monthly RSI.
The Ascending Triangle from the chart can be noticed as well in the RSI with this bullish pitchfork.
This is it for the VIX Analysis. Hope that you found it helpful. Leave a comment, like or follow for more.
-Step_Ahead_oftheMarket-
Note
The Fibonacci Spiral in the chart got distorted while posting. This is the correct one. In any case, Fibonacci Spirals are extremely hard to get right on point, and tview is not making it easy either.
One final point is that in case the VIX doesnt close above 30, the trading range would be in between 30(black line) and 10. We will see how it will all go after the 2020 elections.
Note
In a way angry that I didn't notice this wedge on the SPX earlier. Nevertheless here it is...
Make or break time, end of 2019.
Note
A US/China deal done, so in the short term it invalidates the chart above. Expecting volatility to cool off. Although there's Brexit, and the US/China deal is not even signed yet.Note
Since the deal seems that is about to go through between the US and China, this analysis on the VIX becomes invalid for obvious reasons.Trade safely
-Step_ahead_ofthemarket-
Note
This chart has aged very well thus far!
It doesn't seem that VIX will go below 11, while the trade war is lasting.
Expect more volatility.
_stepaheadofthemarket_
Note
The triangle is getting closer and closer to it's culminating point. The uptrend in volatility continues.Expecting some selling pressure early February. Let's see how it goes.
_Step_ahead_ofthemarket_
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