Monday, October 05, 2009

Monday VIXology

Some dramatic moves in the VXI and Qs charts this week as the markets suffered a technical retreat.
The Qs hit our first level of support at 41 on Thursday and continued down a bit more into the Friday close. Friday's close also puts the Qs eerily in a position identical one month to the day when the LR30 lower channel band was touched and then violated. . .to be followed by a 3 week rally to new highs.
With the Qs RSI2 at the zero level there's a solid argument for suggesting that current oversold level will lift the Qs back to at least 42.50 next week.
The VIX also moved up to 29 levels not seen since early September and aggressively violated the upper LR30 channel band. As with the Qs deja vu' pattern from September 1&2, The VIX
is displaying a similar pattern.
The $64 question now . . .mean reversion or channel kiss-off?
One of the tools I'm working on involves using the VIX to gauge the probability of various system trade setups and I'll give you a little preview of how it looks.
Using the pairs basket concept, I've set VIX as my target pair core and run a variety of correlated and non-correlated ETFs against it.
Keep in mind that you can't actual trade the VIX except as options and as the ETN VXX, but my intent is to not really to trade that side of the pair anyhow, so no handicap there. Instead, we use the momenum signal of the VIX in much the same fashion as the VIX Advantage system to keep us on the right side of the trade and to mimimize draddown.
Also see Bill Luby's relational study of the VIX and VXX.
This is just a preliminary VIX study but with huge implications and I'll be reporting on various refinements as they develop.

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