The VIX and its 200 MA

Discussion in 'Strategy Development' started by Babak, Apr 11, 2003.

  1. Babak


    Here is an interesting little indicator that you may want to keep an eye on. It is a neat little signal generator for market timing (medium to long term -- not short term or intra-day trading).

    It is the difference between the 200 simple MA of the VIX and its current reading. As you would expect, the further the VIX gets stretched from its long term MA, the more extreme the emotion in the market. And as you would expect, the nearer the tipping point for the trend to end.

    Historically readings of -20 (or less...that is -20.50 or -21) are great signals of bottoms and readings of +6 (or more...that is +6.5 or +7.0) are great signals of tops.

    Some recent readings were +6.14 on Jan 14th 2003 marking the short term top in the Nasdaq. And Oct 7th and Oct 9th 2002 with -20.09 and -20.15 respectively marking the bottom for the Nasdaq.

    Of course, this is just an entry. You will have to have another means, either mechanical or otherwise, to implement a stop-loss, to monitor the trade, pare in or out and exit. As well, you can try other MA and see how it works out. I hope it can get your creative juices flowing and get you to try some new things :)

    Oh and by the way, it is currently pointing to a top.
  2. I love using the VIX, albeit not so technically..."the vix is high(>40), time to buy..the vix is low(<20), time to go"...looking at an overlay of the VIX to the S+P is very interesting right now..
  3. Babak


    Yes, well using the VIX that way is rather popular but other than having that as a mark against it also is very few and far between as a signal.

    But using the VIX and its 200 MA, you can get signals that point out minor as well as major tops/bottoms. Its just another way of using the VIX.

    The only problem with it is that it can't really be used as a stand-alone signal but rather must be used with other indicators because it can flag a top/bottom a bit too early.
  4. Then try combining it with a percentage change in NYSE volume. I can think of a number of combinations to try, just would be too tedious to test out over 10 years.

    It is a very good observation though. Thanks for posting the idea.
  5. The thing about the VIX straying a certain distance below its 200 dma (like 5-6 points) is that it has hovered there in the past for 2-3 weeks at a time.

    It is certainly a heads up.

    I find VIX action today can have good accuracy in predicting the next day's bias in price.
  6. gms


    Speaking of ways to use the VIX, I believe Laurence Connors thought the RSI of the Vix could be used profitably. Anyone try that?
  7. wb5983


    The 200MA is +7.6 Any Thoughts?
  8. Yes, its a short term trading model, with about 5 variations, and about 10 variations that he'll sell to you for big$.

    The model is basically:

    If the VIX gets 10% away from its 10 dma its likely to to come back to its 10 dma.Take a long position the S&P when its 10% above, short when its 10% below.

    If the 5 period RSI goes above 70 and reverses, go long, below 30 and reverses go short.

    If both occur simultaneously, its a better signal.
  9. Babak


    Well, usually when there are multiple 'signals' it is more of a significant top. That is atleast what the historical data seems to point out.

    For example there were several, contiguous signals in mid March 2002 all the way to early April 2002. Then there were some more (albeit less in number) repeats in mid April 2002. We all know what ended that -- the blood bath mini crash into October 2002.

    So I would say, we are probably seeing a significant, not short term, top being put in place right now. If not already.
  10. fleance


    #10     Apr 11, 2003