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.