INDIA VIX - Negative Correlation With NIFTY
India VIX is a volatility index based on the NIFTY Index Option prices. From the best bid-ask prices of NIFTY Options contracts, a volatility figure - annual percentage (%) is calculated which indicates the expected market volatility over the next 30 calendar days. VIX value represents the Investors perception of market volatility in the near term.
For those keen on actual computation of VIX & its methodologies can read this White Paper published on NSE - White Paper on VIX.
Higher the VIX Values Higher is the Expected Volatility & hence Higher would the premium be on Options Strikes (Calls / Puts).
Usually its seen that NIFTY rises when VIX falls & NIFTY falls when VIX Rises. India VIX was introduced from 2009 March.
INDIA VIX - 2 Year Daily Chart
VIX moves in a channel most of the times as, if economy is doing well Volatility would be low & hence Index would be slowly inching upwards & VIX would be in a tight consolidating range. There are very few instances (atleast from the day when VIX has been published that it has stayed above 40. During global turmoil VIX shoots up.
From the Chart its clear that VIX has shot up from levels of 16% in June'11 to close to 37% in Oct'11. Post that there has been a significant correction in VIX & it has fallen 25% from the peak of 37-38%.
It's in a trading range of 25-35. As per charts, a bounce can be expected from 25 levels (Channel Support) & may consolidate for few weeks near 25-30 before gaining strength to move up. If 25 is broken then its next support comes around 23. Once 25 is breached it will enter into the channel zone of 15-25.
Indicators: VIX has fallen below its 50 Day SMA. 200 D SMA is near 23 & inching up. MACD is in sell mode & RSI even after having multiple supports at 50 levels has gone to 45 & heading southwards. Indicating VIX can move still down.
Bottom Line: What it Implies for NIFTY? VIX nearing support indicates NIFTY also moving towards its crucial resistance levels of 5160-5180. If VIX bounces then it can be assumed that NIFTY is topping out for short term at around 5250 levels. If VIX indeed breaks the support of 25 and is headed lower, then it can mean that NIFTY has more headroom & can move to 5350-5400 levels.
Keep a close tab on VIX as it can also be a good indicator of how Index would move further.
Would be adding more to this post on Superimposed Charts of Both NIFTY & VIX.
Let me know how you liked this article & would you be interested in reading more on the same lines.
*SMA - Simple Moving Average
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