Aussie VIX (XVI) below 20. What's the implication for XJO?

by Raymond Chan

Last Friday (13 Jan 2012), the XJO closed near 4200 with the XVI at 19.

What does a low XVI mean?

One and a half weeks ago on 4 Jan, when XJO was at a similar level(near 4200), the XVI was at a higher level of 23 . This  time, as we are hitting the 4200 level for the second time in less than 2 weeks, the XVI is only at 19. The lower XVI is indicating a more optimistic investor mood (less fear). The XVI generally have an inverse relationship with the performance of the XJO.

Is 19 low for XVI?

From previous times, each time the XVI falls below 20, it normally doesn’t stop there. It normally falls further before picking back up. The depth varies, but generally at least dropping to around 17, if not the lower of about 15 or 13. So, at 19, it may not have finished falling (which means more potential upside on XJO!)

The last time the XVI was at 19 was in early Dec. 2011 Again XVI didn’t pick back up from there (19) until it fell all the way down to 13. The XJO hit a high of early 4300 at that round. This time at 19, this indicator is telling me that it may continue to fall lower in the teens with more potential upside to go on the XJO (perhaps 4300 like in early Dec11).

What about volume?

The supportive news is that trading volume in Index (XJO) options has increased in the last week. Though the traded volume in both calls and puts were equal last week, but this is a strong move on the calls. This is because it is quite common for trading in puts to be higher than calls in most weeks due to portfolio protection strategies. Last week though, the increase in calls traded were twice as much as the puts (not common at all)

The last time we saw this sort of  strong volume in the calls  was a month ago. This may sound familiar but again it was early Dec 2011 when the XJO pushed all the way up to 4300.

The volume in the XJO calls is adding to the hypothesis that the XJO has a good chance of rising to the 4300 level in the short term. 

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