VIX technical analysis: will the index price go higher in October?

With concerns growing about possible unrest after the US presidential election, the VIX is likely to remain elevated up to and after polling day

vix technical analysis                                 

The VIX volatility index, which trades on the Chicago Board of Options Exchange, is an implied volatility index. The VIX measures the “at the money” strike price implied volatility of the S&P 500 index. The index is a well-known fear and greed metric, moving higher when markets are uncertain and lower when markets are complacent. The implied volatility is used to price the premiums of S&P500 index options. 

Seasonally, the VIX is mixed in October. Ahead of the US presidential election, the VIX is likely to remain elevated. The technicals also point to a higher VIX in October.

Election volatility

President Trump continues to discuss his views on a transition following questions from the press. His latest comments on the legitimacy of mail-in voting are not new, but reinforce concerns about possible unrest after the elections. Trump was asked if he would commit to a peaceful transfer of power whatever the results, to which he replied: “We’re going to have to see what happens.” 

The latest polls still show Biden ahead in most swing states, but it’s quite likely that due to increasing mail-in voting that takes time to tabulate, we may not know the final results of the election until days or weeks after.  Investors are becoming increasingly worried about the post-election period which is helping to push up implied volatility. 

Seasonality of the VIX

The VIX experiences mixed returns in October. Historically, over the past 10 years, the VIX has increased 40 per cent of the time with an average gain of zero. During the past 20 years, the VIX has increased 55 per cent of the time for an average gain of 4.4 per cent. The volatility of the VIX remains relatively subdued hovering near the bottom end of the 2020 range, which means that options traders do not expect volatility from the VIX.

VIX analysis: technicals

The VIX is consolidating in September near the bottom end of the annual range at 29, well below the September highs at 38, which is seen as resistance. Support is seen near the 50-week moving average at 26. 

Medium-term momentum is positive as the moving average convergence divergence (MACD) index generated a crossover buy signal. This occurs as the MACD line (the 12-week moving average minus the 26-week moving average) crosses above the MACD signal line (the nine-week moving average) of the MACD line. The MACD histogram is printing in positive territory with an upward sloping trajectory which points to higher prices for VIX. 

Short-term momentum is also positive but consolidating. The fast stochastic generated a crossover buy signal in oversold territory, but the upward trajectory is slowing. The current reading of the fast stochastic is 33, up from the oversold level of 20. 

VIX: how to trade it

The upshot is that the VIX continues to grind near the bottom end of the 2020 range, well below the more recent highs seen in September. It should be clear to investors that unless there is an election blowout, there could be months of back and forth until a winner is anointed. As the market absorbs this uncertainty, with absentee ballots counted after the election, it is sure to increase the VIX and bring on whipsaw price action into October and November.

VIX Volatility index
Daily change
Low: 23.81
High: 26.18

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FURTHER READING: How to read trading charts

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