Wednesday, July 22, 2009

VIX Pivot Bands - II

This is a continuation of yesterday's VIX pivot bands exploration.
Today is day 15 of the most recent VIX SR cycle, a period that has ushered in reversals the last 2 cycles. And, with the Qs hitting a 10 day winning streak, the odds continue to build for at least a short term reversal.
The SPX has already exceed my weekly upside projection so we'll just take it a day at a time for now. So far I've avoided any short exposure so I can't complain. That could change quickly.
For today. . . to better illustrate the relationship between the VIX and the markets, I've added the SPY data stream on weekly bars to align with the VIX.
As with yesterday, the pivot bands are based on the VIX, not the SPY.
The white vertical bars indicate the pivot band peaks while the green arrows reflect long signals ON THE SPY generated by the LR7 / LR14 crosses on the VIX.
This study only displays results back to mid 2006, although the study runs back to 2002 (not shown to clarify the display size).
In most examples the LR7/14 cross signals lag the pivot band peaks by one or two weeks which could simply be resolved by accelerating the periods of the LRs, but my study goal is not to seek the absolute top or bottom, but to capture the high probability sweet spot in between.
What's obvious from this perspective is that 2009 has been a difficult period to trade the VIX pivot peaks, but a great time to trade the weekly LR7/14 crosses.
That doesn't mean I'm dismissing the utility of the pivot bands. It does mean I'm reviewing the effects of scale in deciphering the VIX pivot band signals. VIX readings that fluctuate between 10 and 20 display signals differently when the range suddenly jumps to 80 and 25 and so my next task is to normalize the range in order to deliver a zero line signal.

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