Success in the financial market
is mostly all about forecasting. This is because you make a decision right now
and forecast what you expect to happen in future. Since forecasting is very
difficult, traders use a number of tools such as technical indicators. In Wall
Street, the CBOE volatility index is one of the best-known tools used to
forecast the performance of the markets. The index was developed by CBOE in
collaboration with Goldman Sachs. It incorporates data from the options market
to forecast how investors are positioning themselves.
For starters, the options market
helps investors predict the future movements of prices of assets. If they
believe that the price of an asset may rise at the expiry, they place a trade
known as calls. If on the other hand they expect the price to drop, they place
trades known as puts. Traders value the options market because in many times,
the traders placing those trades have inside information. Therefore, the VIX
index incorporates the options market in the S&P 500. The VIX is also known
as the fear gauge.
When the VIX index rises sharply,
investors tend to exit the market and when it falls, stocks tend to do well.
Indeed, this has been proven this year. In the US, stocks have made double
digit gains this year. At the same time, the VIX index has been declining.
Indeed, yesterday, it reached the lowest level in five weeks. The decline is
usually a sign of complacency in the financial market. The index reached a low
of $13.5, which was the lowest level since October last year. It is a major
climbdown from the $13.5 level reached in December.
The VIX index rose in the US
session and reached a high of $15. This was along the 38.2% Fibonacci
Retracement level and slightly above the 21-day and 42-day moving average. The
VXX/USD pair is likely to continue moving downwards as traders price-in a
dovish Fed and a China-US trade deal.
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