What Bollinger Bands Tell Us About the Next VIX Move

The slumbering "fear index" could wake up soon, if past is prologue

Mar 13, 2019 at 2:21 PM
facebook X logo linkedin

Unless you've been hiding under a rock, you're probably aware that the U.S. stock market has been on fire in 2019. In fact, the S&P 500 Index (SPX) is on pace to top the key 2,800 level today, eyeing its highest close since early October, before the massive fourth-quarter sell-off. As such, the Cboe Volatility Index (VIX) -- also known as Wall Street's "fear gauge" -- has cooled its proverbial jets, more than halving since its late-December peak above $36. However, if recent history is any indicator, the VIX could be on the cusp of a breakout.

Specifically, the VIX's Bollinger Bands recently narrowed to within 3.5 points -- a range similar to September, just before the aforementioned sell-off, as you can see on the chart below. Many traders use contracting bands as a signal that the underlying shares will see heightened volatility soon. Against this backdrop, we decided to take a look at how the VIX performs depending on the width of its Bollinger Bands.

VIX chart march 13

To analyze the data, Schaeffer's Senior Quantitative Analyst Rocky White broke down VIX returns into three groups based on the width of its Bollinger Bands: when they're within a range of less than 3.5 points, as we just saw; when they're between 3.5 and 10 points apart; and when they're wider than 10 points. The second grouping is most frequent, with over 4,300 returns since 1990 -- more than double the first grouping, and triple the last grouping.

Following a sub-3.50 signal, the VIX was higher more than 50% of the time at each checkpoint looking six months out. That's compared to a positive rate of 50% or lower across the board after VIX Bollinger Bands are wider. So, it's safe to conclude that the VIX is more likely to move higher when its Bollinger Bands are claustrophobic.

More specifically, two weeks after a sub-3.50 signal, the VIX was up 4.52%, on average -- about three times the average return when its bands were in a "normal" range. That's compared to an average two-week drop of 3.11% when VIX bands are more than 10 points apart.

It's a similar story looking six months out. After a sub-3.50 signal, the VIX was up 14.12%, on average, compared to an average gain of 8.85% after "normal" readings, and an average loss of 17.43% after readings of wide Bollinger Bands.

VIX returns based on BBs

In conclusion, the data above indicates that when VIX Bollinger Bands get pinched -- to less than 3.5 points -- by a cooldown in day-to-day volatility, the "fear index" tends to move higher over the next six months. That's not too surprising, however, as volatility expectations for stocks ebb and flow, and narrowing bands often precede the end of a "quiet period" for the underlying -- in this case, the VIX.

In the short term, traders should monitor the VIX's dance around the 18 level, which represents roughly half the December closing high. A VIX close above this level could be a warning of an imminent spike in volatility, as Schaeffer's Senior V.P. of Research Todd Salamone noted in this week's Monday Morning Outlook. Plus, he added, recent Commitment of Traders (CoT) data indicates the next big VIX move will likely be to the upside, as large speculators have so often been on the wrong side of major volatility moves.


Target Effortless Triple-Digit Gains Every Sunday Evening For Life!

This is your chance to triple your profit potential on Sunday evenings, without spending all your free time watching the market.

On Sundays, as a Weekend Plus subscriber, you’ll get up to 6 trades every Sunday, each targeting gains of 200% or more.

Start targeting gains like the ones our subscribers have seen recently, including:

213.3% GAIN on AutoNation calls
100.0% GAIN on Monster Beverage calls
100.4% GAIN on Walgreens Boots Alliance puts
100.4% GAIN on ON Semiconductor calls
257.7% GAIN on Dell calls

101.0% GAIN on Apollo Global Management calls
103.6% GAIN on JP Morgan  Chase calls
105.3% GAIN on DraftKings calls
101.3% GAIN on Airbnb calls
203.0% GAIN on Shopify calls
102.0% GAIN on Cboe Global Markets calls
100.9% GAIN on Boeing calls
102.1% GAIN on Microsoft puts
102.3% GAIN on First Solar calls
101.5% GAIN on PulteGroup calls
101.0% GAIN on Apple calls
209.4% GAIN on NXP Semiconductors calls
100.8% GAIN on Uber Technologies calls
100.4% GAIN on Academy Sports and Outdoors puts
102.2% GAIN on Trade Desk calls
100.8% GAIN on DoorDash calls
100.0% GAIN on Camping World Holdings puts
100.0% GAIN on Cboe Global Markets calls
100.2% GAIN on C3.ai calls
238.5% GAIN on Oracle calls



Rainmaker Ads CGI