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VXN Index Volatility Forecast (10/07/2011)

The last week we were bearish the VXN Index and we forecasted a drop of its volatility which would have, in turn, caused the Nasdaq’s implied volatility index to retrace and test the 13% – 14.5% area. Our target was not “hit” because the index settled at 17.4% but the bearish projection proved very accurate.

The VXN Index opened at 17.7% rose to 17.8% on Wednesday, dropped to 17.7% on Thursday and closed at 17.4% on Friday.

The actual volatility is 4.2% (14.5% monthly) and the TGARCH plot is evidently displaying a slightly downward sloping curve which will keep decreasing over the next hours and settle around 4% (13.8% monthly) which is the long term balance point for this market.

The conditional variance dropped quite significantly because the first days of the week saw a prolonged lateral movement of the underlying asset but what is really important to stress out is that Friday’s announcement left completely unchanged the volatility curve.

The HyperVolatility team remains moderately bearish on the VXN Index because the oscillation rate should decrease and then move sideways all week long. Specifically, the implied volatility index should touch 17% – 17.2% and trade within this range until the next week.

However, if the Index surpasses the 17.7% threshold we would probably interpret that movement as a bearish signal for all major equity indices.

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