Saturday, March 21, 2009

Weekly Update + VIX cross

I first mentioned the VIX/price crossover back in January. Although the signal appears infrequently, it turned out to be a great tell for last week's price action. I've turned the VIX overlay on for this week's update to show how it played out. The working premise was that once the VIX chart crosses the price chart, price momentum will continue for a few days in the direction of the cross before reversing.
There are a number of ways to use the VIX cross. The simplest is to just trade the cross (having reviewed previous performance of the cross on your own trading targets). Another is to apply the VIX cross to a basket of stocks/ ETFs to see which are the leaders and which are the laggards. This is the kind of logic behind the 3 Finger studies and displays the "second mouse gets the cheese" tactical approach that I favor for my own trading. While seldom hitting outlier highs and lows, it's a low risk trade that very often captures the sweet spot in the momentum cycle.
The Telechart platform allows users to simply set up the VIX as a comparison overlay chart in either candles or as a line. I can accomplish the same display with Schwab StreetSmart Pro, with the relative scale of the VIX and the price charts converted to a common base. Getting this type of display in TradeStation is a bit more complicated and if any of my TS followers care to jump in and post the setup, please chime in.
I'm currently working on an intraday application of the VIX/price crosses that I call VIXEN. More on that next week.
As far as this week's ETF basket charts signals go. . . they're all distinctly bearish.
All ETFs coming off uber overbought LR30 upper channel band. First stop = upper band, next stop down is the channel mean.
MACD is negative and its 3/7 MA momentum signal (MAs are on top of the MACD, not stand alone) are negative with bear crosses on all 4 ETFs.
RSI(2)s are similarly coming off 99% overbought levels.
(IMHO) (For swing traders) If not short, safest to be fully hedged at LR30 channel high band levels, or flat and waiting for a re-basing.


Damian said...

Would it be more correct to say that you're looking for a cross over of the ratio of, say QQQQ/VIX, over the price of the instrument (in this case QQQQ) itself?

Just trying to wrap my head around this idea....

bzbtrader said...

I'm not sure about that and tomorrow's post discusses the concept in a little more detail. I'm actually looking to Jeff to help me sort this one out. For now all I can say is that both Schwab and Telchart have managed to provide a graphical interface for the VIX/price crosses and that makes the setups easy to see on these high probability trades.