Kimble has identified a so-called head-and-shoulders topping pattern in XIV, the inverse volatility product. If the bearish pattern is triggered, XIV could fall a large percentage and VIX could see a strong rally, he says.
One last word on inverse VIX products: They have benefited from a declining VIX and also “contango” in futures markets when longer-dated contracts are more expensive than the front-month contract. However, if this condition reverses and the futures market moves to “backwardation,” then inverse VIX products will take a hit.
“When this trade turns around, it happens quickly,” writes Brendan Conway at Barron’s. “The change in the volatility environment and the reversal of the ‘contango’ benefit would constitute something of a one-two punch” for inverse VIX products, he added.
VelocityShares Daily Inverse VIX Short Term ETN
Full disclosure: Tom Lydon’s clients own SPY.