Identifying Key Levels in Volatile Equity Markets
If you are trading the equity markets during volatile times, there are a few things you need to know. This volatility can create problems for traders because the VIX is up significantly at new highs. The VIX measures the level of volatility in the markets and determines the prices that investors are willing to pay for various equities related options. Paying attention to the VIX can help you to understand what to expect in the markets in terms of price swings and how to react.
Understanding the VIX
In other words, if the VIX is at 25, then the volatility in the S&P index could swing 40 or 50 S&P points during a given day. In a normal uptrending market the VIX might be at 12 which means that the price action is calmer and the swings could be 10 to 15 points a day. Also by tracking the highs and lows of the VIX, this provides another indication of when to anticipate the market turning points during various pullbacks within a trending market. So during the pull backs in an uptrending market, the VIX will rise … and during the market rallies the VIX will decline. The VIX represents a gauge of certainty or uncertainty in the markets … and a trader can use it to determine the price action response.
Figure 1: The key levels on the VIX are at 12 and 22
Higher Time Frames
During times of high volatility when the VIX is at its highs, the market is in a steep decline. A trader may not be accustomed to the larger moves in price and this can throw off your timing. The key to getting your position entries and exits on target is to focus on the higher time frame charts to identify your key levels of support and resistance. Trading around these key levels will help you to stay disciplined and focused and not react too early to major moves in the price action. Be patient and wait for the level.
Fibonacci Clusters
As you begin to identify your support and resistance levels on those higher time frames, you can also see how the Fibonacci zones around the 50% and 61.8% levels interact with those price action support and resistance levels. This creates a cluster of both price action support or resistance in conjunction with the Fibonacci level which increases the reliability of the level where you are initiating your position entry.
Figure 2: Notice the key level at 1816 clustering with the 61.8% Fibonacci level.
Historical Support & Resistance
When it comes to historical price action support and resistance, many traders are ill advised as to the proper way of identifying these levels. Traders often look to levels with a single touch as a point of support or resistance, but in actuality you would want to see at least two touches at a specific price level before determining a support or resistance level. Another point of confusion for traders is often finding their key levels on the lower time frames … you will typically have far more levels to contend with and you will not be able to determine the correct level without using the higher time frames charts.
So stick with your higher time frame charts during times of high volatility and expect to see larger moves in the price action. Key price levels and Fibonacci clusters can really help to keep you disciplined during these times and make the most of your trading.
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