VIX Doesn't Capture This - New Levels of Volatility in the NASDAQ Futures with Zig Zag Indicator


On January 24, 2022, we saw new intra-day levels of volatility as measured by the Zig Zag Indicator. The Nasdaq futures changed directions 75 times on 50+ point moves. 50 points in the E-mini Nasdaq futures is $1,000 per contract. At the height of the pandemic, we saw readings as high as 62 based on intra-day price action (not including overnight session data).


Its also important to note that on January 24, 2022, the S&P reversed from 4% down to close up for the day. This was the first time since 2008 that this has happened - the market being down by 4% or more and closing up for the day.


As short term traders, we see a market that is moving back and forth in wild ranges and using the daily range or VIX just doesn't capture what we are seeing and trading.


The VIX closed at 23.22 on Friday, February 4, 2022.


The VIX tells us more about the markets fear of dropping (fear gauge) or how far the market has dropped. The market has bounced "a little bit" the last couple of weeks so the VIX is down.


The Nasdaq futures could have a 500 point range with different paths. If the Nasdaq opens near it's low and closes near it's high on the day with little retracement, the trend can be more discernable and easier to trade. If it moves back and forth all day in non cyclical 500 point ranges it can be very difficult to trade.


We deal with stop running and choppy markets as traders and then get a decent trend. The decent trend days have been more non-existent lately and replaced with wild reversals.


These new levels of volatility can challenge even the best algorithmic trading systems and make it more challenging to trade.


The Zig Zag Indicator gives us a picture of this type of volatility and the challenges to trading this type of market. The way these numbers are coming off their highs is similar to the pandemic so it is possible the intra-day swings could narrow and drop back to levels prior to January 2022.


Its difficult to imagine this type of price action could continue even if the market drops. In the 2018 taper tantrum and 2020 pandemic, the Federal Reserve "fixed it", the market that is, with "easy money", referred to as Quantitative Easing (QE). They can't "fix it" this time with inflation on the rise and have committed to Quantitative Tightening by increasing the Fed Funds rate and reducing the balance sheet.


Will there be even more turning points if the market drops and VIX rises or will there be a sharp sell off 1987 style, crushing the dip buyers with no rebound? The dip buyers will either get their way and the market will start to move higher with less chop and more trend or eventually get crushed if the market continues to sell off, giving the bears a nice trend down. As a short term trader, I am anticipating moves in either direction with less back and forth price action and with fewer wild swings. After this historic level of chop, we could see our biggest trend day ever in one direction or another. At the same time, I continue to research more reversal strategies.

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