Wednesday, April 02, 2008

More VIX chatter

Some excellent posts regarding the VIX from Bill Luby and Adam highlight the argument that the lowest risk use of the VIX is likely as a trend indicator rather than a trading vehicle. This holds especially true for retail traders. VIX options trade in .05-.10 spreads, and although open interest is robust, this is a CBOE product and exchange participation is limited.
Bill offers a nice relational study of the VIX and Adam delves into some nuances of VIX support and resistance behavior as measured by moving averages.
I monitor the VIX on 2 minute bars, along with the NYAD and the TICK as part of my intraday trading using the signal line, the RSI and the 10&20 bar SMAs. Most of the time there are few clues to intraday trend change, although every once in a while there's pay dirt in VIX/NYAD convergences.
For longer term traders, I've noted some of my favorite VIX indicators (and settings) on the chart above in order to help identify likely market pivots.
CCI (24) A little longer period than Woodies 6 and 14 period system, but optimized for the VIX, the trend pivot signals are pretty impressive.
Parabolics (.05, .2) Traditionally used as a trailing stop signal, I use it for intraday triggers and exits on 5-8 minute bars on the Qs, although it can generate premature exit signals (as per Tuesday's post).
ROC (rate of change) (12) Generates signals similar to the RSI as an overbought/oversold momentum indicator. ROC is the difference between the current price and the price "n" periods ago.
As with all technical analysis tools, it's important to spend time backtesting indicator triggers and exits in your trading time frame, whether 2 minute, 30 minute, daily, weekly, etc. to confirm signal efficacy and to develop a risk management plan that reflects your comfort level.
Let's get Rob Hanna to run some correlation studies to see if any of this makes for a tradable edge.


Bill Luby said...

Great stuff, Bob. Thanks for sharing some of your thinking on the VIX -- and thanks for the link as well.

Interestingly, as much as I love the PSAR, I have yet to apply it to the VIX, so excuse me while I go fire up some charts...



Rob Hanna said...

Very interesting ideas. Thanks for sharing and thanks for the mention.

Looks like I'm going to have some additional homework to tackle when I get some time!