Monday, March 21, 2011

watching the VIX

Many watch for extreme moves in the VIX to try an pinpoint tops and bottoms.  IMO it is not that simple.  They use envelopes:[s175637869]&disp=P

Note: I would have time shifted the envelope if it were my chart.

Or, Bollinger Bands:[s179178685]&disp=P

Others use VIX VXV ratios (Google VIX VXV signals).

The concept is extreme moves in the VIX can help in spotting tops or bottoms.  Not that complex a concept.  But you don't need envelopes or Bollinger bands to spot extremes.  Any teacher knows about the Bell Curve and how in a normal distribution  2 standard deviations covers either side of the midpoint  about 47.5% of the population (or 95% on both sides of the midpoint).  This is how teachers grade on a curve (figures break points for a grade).  See for yourself: 

So we apply the Bell Curve as a teacher would to a grade (sort of).  Say the VIX is at 15 (a bottom).  95% of 15 is 14.25 - so a move to 29.25 (15 + 14.25) would be an extreme move up.  If the VIX were at 30 (a top) we would use 47.5% of 30 (14.25 points).  A move down from 30 to 15.75 would be an extreme move off the top....

We have just encountered such an extreme move (03/16).  See for yourself:

Now the VIX normally moves inverse to the market (it goes up when the market goes down and it goes down when the market goes up).  So an extreme move up suggests an extreme move down in the market (So we are now on alert for a bottom).

But this alone is not enough to call it a bottom.  We need confirmation of some sort.  I Suggest the best confirmation is market action.   Research suggests to me we need 3-4 consecutive up days to confirm we bottomed and a trend reversal is taking place.

We use mirror image logic for a trend reversal down.  NOTE  - this methodology will not call all reversals, so you will use it in conjunction with other tools, but it is reliable when it does give a signal.

UPDATE 03-21 04:30pm EDT - we got 3 consecutive up days to confirm our VIX signal.  That means the trend should now be up.


  1. I am not sure how I stumbled onto your blog but have been intrigued by how you analyze the markets using time cycles. How can one go about learning this? If I may be so bold as to ask.

  2. Fastarrow

    I have several posts about cycles, cycle lengths, how to isolate cycles, etc. So that is probably a good place to start.

    You will find a couple of guys online (articles) that may be worth reading: Clif Droke (Google Clif Droke cycles) and David Knox Baker (Google it).

    Finally there are a plethora of books on cycles. The first one i ever read was by JM Hurst:

    Well, this should be enough to get you started.


  3. Thanks Inlet,

    I have started to go thru everything on you blog. I ordered the Clif Droke book on cycles. I also found an interesting site, . I'm sure all this will keep me occupied for some time.

  4. Fastarrow:

    Clif Drokes seems OK. He seems to be biased toward the Kress cycles. Not sure the Kress cycles are the whole story. You will see I discuss cycle theories from several sources.

    Also, there is cycle oriented software out there (Not sure which if any is worth the price so I have not tried to cover that on my blog)....

    GL in your studies.