Thursday, July 26, 2007

What Is The VIX Saying Right Now

Above is a 3 year weekly chart of the S&P500 and below that is the VIX. As you can see when the VIX gets above 16 it usually coincides with lows in the S&P.

If you look at the previous six major buying opportunities in the S&P over the last 3 years, the VIX pinpointed every single one of them with a reading above 16.

There are a few ways to play this if you are looking to buy. You can simply buy at support which is around the 1450 to 1460 area or you can wait for the market to turn back up by making a one or two week high. I prefer to let the market turn back up a little before I get involved.

As a trader it's important to be consistent with what you are doing. Last March when the market sold off and the VIX shot up above 18, I thought about buying this market but I was actually bearish because I thought the potential unwinding of the Yen carry trade would cause the market to sell off. I totally missed a HUGE buying opportunity because I began looking at so many different intermarket relationships that I lost track of the most important thing in trading, and that is the TREND.

The trend is up, there is fear in the market(VIX) and I know the commercial traders have been buying so my strategy is to look for reasons to buy.


dps said...

Nice work. I would not even know to look at that chart, Thanks!


Aurelien said...

I agree that this is likely going to be a nice market bottom, but it seems as if the VIX is going to be in a high range then it has been in the last year and will thus spend more time over the 16 mark.

Anonymous said...

Awesome chart. Last summer there were three VIX spikes above 16, and the bottom wasn't in until the third. I wonder if we'll see something similar considering we are in the same weak seasonal period.

Kevin said...

Actually the second spike in the VIX coincided with the low last summer, but it wasn't until the 3rd spike that the market began to move.

throwaway said...

Kevin as always your analysis is really enjoyable to read.

Personally I would be very wary about the S&P due to changes in perception of fundamental factors. Nobody yet knows how big the loss of capital is due to the sub-prime saga and I think that leaves the market very vulnerable. Just my opinion though

mak said...

Great idea for a blog. Keep it up!! :-)

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