Volatility Returns Take 2

After yesterday's analysis of the Volatility Index ($VIX:Market Data Express), it's important to look at the follow through today.  The thesis yesterday was wise investors are buying downside protection in light of the news Cyprus failed economically, and the markets need to consolidate because of how extended they are regardless of Cyprus.  The broader concern is that woes in Cyprus may impact the Euro Zone in a big way moving forward. The chart for the Proshares Ultra VIX Short Term (UVXY:NYSEArca)

showed a volatility expansion closing the day at $8.80. If the expansion continued higher, the price could reach $10.00 share and spell disaster for indices.  The chart shows modest selling in the morning today that led to $8.31 before promptly turning around and heading to its intraday high ($9.70, +1.39 from the morning low).  Further price increase was halted by the news that the European Central Bank would continue to provide liquidity to Cypriot banks. UVXY closed on the day at $8.78, or a $0.92 (-9%) decline from the intraday high. 

Does this mean the Daily Inverse Vix Short Term (XIV:NYSEArca) is a buy? Possibly, if you think there will be less activity in the $VIX.  Considering the chart for the Direxion Small Cap Bull 3x Shares (TNA:NYSEArca), possibly not. 

The 21-Week Simple Moving Average (21-Week SMA) is just arriving to $70.00, while the current price is $87.03, i.e., the stock is extended over its average by 24.5%. An extension that high cannot sustain for long.  Looking at the longer trend, the TNA is in a volatility expansion that needs to consolidate before moving higher.  The price could decline closer to the 21-Week SMA, for a loss of about 8% of its current price, before it finds support.  If you belive this thesis, short term puts and a hedge with the Direxion Small Cap Bear 3x Shares (TZA:NYSEArca) would be a fair play. Regardless, the market will listen to the Federal Reserve Wednesday, 3/20/2013, for clues about the length of time for the current bond buying program, as well as any indication for a rise in interest rates. Markets will move on that news more than any other, unless there is more Euro Zone crises. Still, the market is extended and in need of consolidation.

Disclosures: I have no positions in any equity mentioned, although positions may change within the next 72 hours. This blog is intended for recreation and is not intended to be construed as investment advice.