The iPath S&P 500 VIX Short Term Futures ETN (VXX) is one of the largest and most volatile ETF. VXX typically moves opposite to S&P500. When S&P rises, VXX goes down and vice versa. When ETF moves up and down, just like any security, it develops trend, resistance and support levels, candlestick patterns etc.
Here is the link to understand the risks associated with this ETF.
In the above chart, we compare the price movement of VXX and S&P500 using weighted alpha. The weighted alpha (WA) is a technical indicator used by investors and traders to identify stocks that has under_performed or over_performed over a period of time. Weighted Alpha is a measure by assigning weight to the price of the stocks against time. In this example, we have applied gradual declining weights (a proprietary formula) to the price of the stock as we move back in time.
A careful observation of the above chart explains the volatility of this ETF with respect to S&P 500.
All the three major US stock indices namely NASDAQ Composite, Dow Jones Industrial Average, and S&P 500 are hovering at their multi year highs. Several factors can play against these indices that can either temporarily halt their upward move or serve as a starting point for their downward rally. Political uncertainties, current US trade war against China, rising interest rates and housing market slow down in the United States, recent attack on the oil assets in Saudi Arabia, to name but a few.
For any reason, the US stock market pulls back, VXX has a huge potential to surge and reward the investor, provided VXX continues to exhibit its current behavior. This volatile ETF has several limitations, assumptions and risks unlike a conventional stock. Please read the risks associated with this ETF here). It is important to understand that VXX has a potential to reach $0.
In the absence of a crystal ball, for reasons explained above, we believe in the upcoming months, the odds are higher for S&P500 to halt its uptrend, which may influence a temporary surge in the price of VXX.
We are not a registered investment advisor or a financial advisor or a brokerage firm or an investment company. If you should choose to interpret information from this page/Theory of Stocks, LLC, as investment advice, you do so at your own risk. Please read our disclaimer.
Financial information cited in this article are taken from Yahoo Finance (http://www.yahoo.com/finance); EPS data is taken from Zacks Research (http://www.zacks.com); some of the definitions have been taken from Wikipedia (www.wikipedia.com)