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Note from the MD: Market volatility climbs back to COVID sell-off levels

May 18, 2022

Note from the MD: Market volatility climbs back to COVID sell-off levels

Over the past five weeks, we have seen implied volatility rocket higher from around 11.5% on 14th April towards 25.1% on 10th May – the most aggressive acceleration in volatility since the COVID sell-off in February/March 2020.

Over the past five weeks, we have seen implied volatility rocket higher from around 11.5% on 14th April towards 25.1% on 10th May – the most aggressive acceleration in volatility since the COVID sell-off in February/March 2020.

Over the past week, implied volatility has pulled back from recent highs and is currently sitting around 17.5%. With implied volatility spiking at high levels and many market commentators expecting a significant market pullback on the horizon, we could see a wider trading range for the XJO than in previous years.

Today, the XJO opened in positive territory pushing through resistance at 7130 that held the market back on Monday and Tuesday, then tested resistance at the 7200 level.

On the upside of the market, we see the 50-day and 200-day MAs converging on the next major resistance level at 7340. With three major selling levels lining up, we expect selling pressure to be significant at 7340. This may result in a quick retracement back towards 7000 in the coming weeks.

On the downside we see support around 7065, with the next major support at the 7000 level. Further out, we see major support around 6750 (tested on 27th January) and major resistance around 7630 (all-time high is 7632.8).

Year-to-date, the energy sector has been the strongest ASX 200 performer (+29.7%), followed by utilities (+24.1%), as both sectors rebound after struggling through the COVID period. The worst performers have been tech (-31.1%) and consumer discretionary (-17.73%), both of which had experienced strong bullish runs since the COVID sell-off in early 2020 until the end of 2021.

Yesterday, the ASX 200 Index (ASX: XJO) found firm footing higher to reach 7112.5 points – a 0.3% rise. Following a strong show in the US markets overnight, we saw this translate to a considerable rise into today’s ASX 200 open.

While this may have been a silver lining, the cloud of uncertainty still looms overhead as inflation continues its campaign and other macro-economic factors such as the fast-approaching election this weekend and the ongoing Russia-Ukraine conflict are still dictating how the markets move.

There’s no shortage of events that can contribute to the highly volatile nature of the current market, and while navigating the market during this time can be challenging, it is not necessarily impossible.

High volatility markets give us more trading opportunities. Whilst investors generally want the market to go up, options traders don’t care, we just want it to move. As long as we can predict the move, we can make money.

Tomorrow, together with industry leader Ivan Tchourilov, we will teach you three strategies that allow you to trade volatility and the market when it’s going up, down and sideways. Click here to register for the session.

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Any advice provided by Reach Markets including on its website and by its representatives is general advice only and does not consider your objectives, financial situation or needs, and you should consider whether it is appropriate for you. This might mean that you need to seek personal advice from a representative authorised to provide personal advice. If you are thinking about acquiring a financial product, you should consider our Financial Services Guide (FSG) including the Privacy Statement and any relevant Product Disclosure Statement or Prospectus (if one is available) to understand the features, risks and returns associated with the investment.

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