Can you please explain this to me like I’m 5? I understand that the $VIX is a measure of volatility but I’m not quite sure how to interpret this chart or what the effect a “range expansion” has.
Discussion
When it comes to studying price, it's important to recognize that price oscillates between periods of consolidation and expansion.
As it relates specifically to $VIX, it's good to understand that there is a huge cottage industry of traders who run a gamut of volatility selling strategies that are akin to picking up pennies in front of a train.
Most of the time these options sellers pick up those proverbial pennies, but there are those periods when volatility does not revert and these traders get run over.
In this situation, when I use the term range expansion, I am describing 2 scenarios.
1 - $VIX is now trading above and through its average monthly range (light blue line).
This does not occur often, but you can see on the chart that when $VIX closes above this monthly range, it tends to lead to further price expansion.
2 - Range expansion also describes a sequence of price action involving broadening formations (shown in red) where price moves from one side of the range to the other. TLDR - The markets are an auction mechanism that seeks liquidity aka stops, which is why we often experience periods of higher highs and lower lows.
I don’t speak the language of finance daily, but I think I understand. I’m going to study your answers and teach myself to understand. Thanks for your time.