Monday, May 05, 2008

VIX Update

This will probably be my last comment on the VIX as Bill Luby, Adam Warner and Rob Hanna (and many others) have featured introspective analyses of VIX attributes and behavior. Bill Luby (call him Mr. VIX) recently posted a comprehensive VIX 10 point primer that is a "must read" for any serious student of market dynamics. Adam is the real deal, having made his bones as a floor trader, and his insights are always timely. Rob Hanna markets a number of VIX related studies in TS8.2 open code format at very modest prices, for those inclined to further research or, if you bug him enough, he'll probably run a study to check out your trading bias and post the results.
What I noticed this weekend is the current level of VIX support (or is it resistance?)
The top chart is daily bars with the 18-30 range that has held for almost a year. Those temporary pops to 35+ levels have been great trading opportunities and the recent retreat of the VIX from mid March to the present has surprised more than a few traders in the face of the deteriorating economy. Current technical indicators are oversold.
I stepped back a bit to look at weekly bars for 3.5 years and got a little different perspective. That 18 level that looked like support in the daily chart now looks like resistance in the weekly chart. Could the VIX really get back to 10? That would likely put the DOW at about 15,000 given current levels. Current weekly VIX technicals are also oversold, but looking back to mid 06 suggests they can get significantly more oversold without stretching historical precedent.
Finally, I stepped way back to look at monthly bars in TC format using my 3 linear regression template (30,11,3). Those who follow Worden Bros. know Don's premise is that we are in a secular bear market and current market strength is but a temporary rally reprise. The behavior of the VIX 03-07 clearly reflects the rise of the bull, while the current technicals on the monthly chart are neutral to overbought, with the LR30 suggesting a possible retracement back to 14 as a support level. The LR11, which has provided a support/resistance channel for the past 15 months, has now been penetrated solidly to the downside, increasing technical odds for the 14s.
This is a chart to keep an eye on, especially with respect to the 10/20 MAs as a developing downslope 10 MA would definitely encourage a bullish stance.


Bill Luby said...

All this talk about no more VIX posts had better just be empty threats, Bob. You appear to be equally adept at whatever topic you choose to drill down on, so there is no reason to limit the scope of your posting.

No matter what happens, thanks again for sharing all your insights.



Scott said...

Bob -

Thanks for "daring" to post a technical analysis of the VIX. Those who claim that you can't do TA on the VIX because "it is not directly traded" are missing the point. Whether a first, second, or N-th level derivative, the VIX is, after all, a mathematical reflection of human psychology and behavior, just like a stock chart.

The VIX is a VERY instructive chart, particularly the perfect 2007 uptrend followed by last month's clean break. But there are still people out there who believe that its patterns are meaningless other than as history.

I'll take as much VIX commentary as you can type.

One question (if it makes sense): with a stock you look for convincing volume to verify a breakout. What would be the equivalent for guesstimating if the recent VIX drop is a long-term permanent thing, or temporary? Would it maybe be the volume of options traded?

bzbtrader said...

Thanks for the encouraging words. My intent is to develop a new focus for the blog within the next month devoted to "system" daytrading. Whether VIX dynamics can provide a useful correlation to those ends remains to be seen.

bzbtrader said...

Interesting idea on VIX volume as a momentum tell. I'd love to hear Adam Warner's spin on that question. Meanwhile, I'll look into it and post any results.