What to Trade When the VIX Is Falling

With the VIX (CBOE volatility index) dropping, plenty of traders are getting ready to bail from equities altogether. They’re forsaking otherwise good setups, afraid that a future rise in volatility could spell disaster for any positions they’re currently in (or plan on entering soon).

But thankfully, when the VIX is sinking, you can still find trades that’ll move in your favor.

Even during a return to higher volatility.

All it takes is a keen eye and some simple trend recognition, because what we’re looking for is something that you won’t be able to “unsee” once you’ve identified it.

In the weekly candlestick chart above, KEY has created a very obvious triangle formation over the last few months. The price action here has tightened more and more as time went on, increasing KEY’s “choppiness” considerably.

Whenever a stock chops itself into a corner like this, it’s almost always setting itself up for a big breakout to one direction.

And because the VIX is low relative to where it was in early May, it seems like the market could be preparing to get highly volatile once again – especially when you consider how much equities have struggled to stay afloat towards the end of last week.

Once the VIX rises, a high volatility market could absolutely send KEY past either the upper or lower trendline, creating an opportunity to go either long or short on the stock.

And though a breakout to the bottom could certainly occur, it looks like in KEY’s case a breakout towards the top is far more likely. The most recent weekly candlestick closed above the highest high of the last 3 bars (something I like to see in a long trade).

Because of that, I’d be very comfortable taking a chance on this one, even though the 50-week simple moving average (SMA) is trending downwards. Moreover, KEY has set two higher lows in a row – one in March and another just last week in June.

It’s a strong looking trade because of that.

But just in case, I’d also want to keep an eye on KEY shares to see if they move below the lower trendline. The 50-SMA is trending down, after all, and if a breakout does occur past $15.70, then a trend continuation could wipe out any positive effect of the bullish signals I just mentioned.

Bears would likely run KEY ragged at that point and getting short before the dip could net you some quick gains.

Still though, from what we’re seeing right now, an upwards movement looks more likely.

So, over the next few weeks, I’d suggest following KEY in your favorite charting software, not necessarily to trade, but to gain some insight. It’s certainly in a unique position, and in general, it represents what many opportunistic traders seek out when uncertainty grips the market.


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