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Volatility Index Shrinks To 6 Month Low at Trader’s Narrative

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During the last week of February 2009 I mentioned the divergence between the CBOE volatility index and the S&P 500. There were arguments for either side because the divergence could have been viewed as either bullish or bearish, depending on your bias.

Although the market did fall another 13% from the day I wrote about the VIX divergence, it snapped back abruptly. During the intense rally (27% so far) the next conundrum was why the VIX continued to float above the long term support line. As of last week (Friday April 10th, 2009) it finally succumbed and broke below:

volatility index VIX April 2009

It may be difficult to see the breakdown in the chart above, but it is there. The VIX finally lost its 40 handle with a gap down. But this is just an initial breach with the next support level (previously resistance) at 30. So there’s a lot more work to be done to bring the VIX level near anywhere approximating “normal”. But it finally is moving in a more logical way and arguably, confirming the rally.

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