VIX ETFs Form Possible Double Bottom Amid Rising Volatility

The CBOE Volatility Index (VIX) jumped over 6% Wednesday as uncertainty about a relief bill passing before the election weighed heavily on investor sentiment. Hopes of Congress passing a coronavirus stimulus bill before Americans head to the polls on Nov. 3 are fading as both parties remain in a stalemate about the size of a relief package. To date, Democrats have said that they’re prepared to reduce the HEROES Act spend from $3.4 trillion to $2.2 trillion, while republicans have indicated that they have a ceiling of $1.3 trillion to $1.5 trillion – a difference of almost $1 trillion.

Key Takeaways

  • Democrats are prepared to spend $2.2 trillion on the relief bill, while Republicans have a ceiling of $1.3 trillion to $1.5 trillion.
  • The iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX) has closely aligned swing lows and a bullish divergenceindicating a possible double bottom.
  • The ProShares Ultra VIX Short-Term Futures ETF (UVXY) has a similar chart setup that may see the fund test a zone of resistance between $29 and $39.

Wells Fargo Securities believes there is only a one-in-four chance that the sides can reach a compromise before the election. “Ultimately, we think the prospects for pre-election relief legislation are unlikely, as the current position of the two parties appears to be a bridge too far,” says analyst Michael Pugliese, per Forbes.

Those who expect volatility to intensify in the leadup to the presidential election should consider these two exchange-traded funds (ETFs) that track the performance of the VIX index. Below, we take a more detailed look at the specifics of each fund and identify possible trading opportunities using technical analysis.

iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX)

With assets under management (AUM) of $735 million, the iPath Series B S&P 500 VIX Short-Term Futures ETN seeks to track the performance of the S&P 500 VIX Short-Term Futures Index – a benchmark with exposure to futures contracts on the CBOE Volatility Index with average one-month maturity. The fund, which carries a 0.89% annual management fee, turns over more than 30 million shares per day on narrow penny spreads to keep transaction costs low. As of Sept. 24, 2020, VXX is trading 66% higher year to date but has fallen 32% over the past three months.

The fund has formed closely aligned swing lows roughly a month apart, indicating the formation of a possible double bottom. Furthermore, a bullish divergence between the relative strength index (RSI) and price over this period suggests waning seller momentum. Those who trade the fund at these levels should aim to book profits near $37.50, where the price finds overhead resistance from a key horizontal line. Manage risk by placing a stop-loss order under the lowest point of the pattern at $23.64.

The relative strength index (RSI) is a momentum indicator used in technical analysis that measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of a stock or other asset.

ProShares Ultra VIX Short-Term Futures ETF (UVXY)

The ProShares Ultra VIX Short-Term Futures ETF attempts to provide investment results that correspond to 1.5 times the daily performance of the S&P 500 VIX Short-Term Futures Index, effectively making the fund a geared version of VXX. Average dollar volume of nearly $1 billion per day combined with tight spreads provides ample liquidity for tactical traders to exploit short-term fluctuations in market volatility. UVXY holds $930 million in net assets, charges a 1.65% management fee, and is up 57% on the year. Since late June, the fund has fallen 46% as of Sept. 24, 2020.

Not surprisingly, the fund’s chart correlates closely with VXX, given it tracks the same underlying index. As the September swing low made a slightly lower low, the RSI made a relatively shallower low, clearly showing a bullish divergence here also. Those who trade the ETF should set a take-profit order somewhere between $29 and $39, where price finds a zone of resistance formed by two crucial trendlines. Think about cutting losses if the fund closes beneath this month’s low at $18.55.

A take-profit order (T/P) is a type of limit order that specifies the exact price at which to close out an open position for a profit. If the price of the security does not reach the limit price, the take-profit order does not get filled.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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