Sunday, November 7, 2010

Using the VIX for trend change signals

Many follow the VIX for potential trend changes.  Often they use Bollinger Bands (2 std deviations) to track extreme moves.  2 standard deviations is 95% move off a bottom or 47.5% off a top.  But using that alone tends to give false signals.

So I approach it a little differently.  I use MA envelopes with the envelopes 12% above and below the MA.  If the $VIX closes above the upper band then you have a potential trend change from down to up (remember the $VIX moves opposite the market).  For confirmation I want 4 consecutive up days.  If the $VIX closes below the lower band then you have a potential trend change from up to down.  Again we need confirmation - 4 consecutive down days.

We have had a close below the lower channel over 3 weeks ago, but are awaiting confirmation of 4 consecutive down days to declare a VIX signaled trend change to down.

See for yourself:

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