Volatility and Volume Gaps

Volatility has been at extreme levels since late February when the COVID-19 virus took hold of the planet. The last time the VIX spiked to such lofty heights was back in 2008 when the housing bubble burst. Financial firms took on too much risk with uncollateralized loans, and the Fed failed to stem the tide of toxic mortgages. The VIX shot up to nearly 90 in Oct 2008, and it took about seven months for this so-called fear index to return to normal levels.

During this pandemic the VIX rose from fair value or mid-teens to 85 in less than a month. Since the top was hit in mid-March, VIX has been trending lower while the stock indexes have been clawing their way higher. During this span we have seen major gaps in price from daily closes to opens. The low volume pockets that are left behind are worth noting because of what happens when they are visited. Old gaps in price tend to provide support/resistance when retested. So, if you are looking for entry or exit areas when volatility is high refer to the gaps in price. The SPY 60-minute chart below shows how short-term extremes (daily high or low) are frequently made when the areas that are void of volume are tested.

More clarity and control regarding the virus are needed before the VIX returns to normal levels. Until then the overnight swings and subsequent price gaps are apt to be prevalent.

John Seguin, Market Taker Mentoring

Trader Education