Monday, March 15, 2010

Consequences of a Low VIX

Everyone knows the VIX has been in freefall for the past year, but for daytraders and short term swing traders this has consequences . . mostly of a negative nature. Gone from recent memory are those Prosac-grabbing 500 point daily spreads that provided the catalyst for more than a few traders closing up shop and finding other meaning of sustaining a livelihood. Back are the days of low volatility and, presumably, relative market calm.
Until the next black swan appears.
But, as part of this dramatic volatility decline, the daily ATRs have also decreased dramatically. Above and below are the SPY and Qs charts with the 8 bar ATR shown in the lower tech panel.
Since last April the SPY's ATR has dropped from 3.00 to the current 1.10 and the Qs have dropped from 1.00 to .52.
Now these are absolute values, not percentages, so the ATR of the Qs is actually large than the SPY. Also to be noted is the fact that these ATR values have to be considered in the context of the underlying price change. Hence, in April, an ATR of 3/price of 70 = 4.0%, while a current ATR of 1/price of 115 = 0.8%, only 1/5 the April value. You can run the numbers of the Qs, but they turn out similar.
The net result is that those 90 minute daytrades that use to produce a $.75 gain are now yielding a measely $.15. So while you may have improved your daytrading skills over the last year, you had to improve your performance by 500% just to keep up. They call economics the dismal science . . maybe they should call trading the dismal profession.

And what's a little surprising to an ole geezer like me is that the VIX ATR profile below looks exactly the same as the SPY, Qs and basically all the majors. So the VIX is kind of a victim of it's own success, and if you want to peek at the REALLY dismal consequences of this swoon, just check out the chart of the VXX . . the VIX futures based ETN. But more on that at a later date.

OK, enough of the grim realities of trading . . let's get back to the Neverending Story of the bull market. Friday was, well, a day to be doing something else. The NYAD hung on a neutral 1.00 value like static cling after a brief opening pop&go. TICK was neutral, volume was non-confirming and the closing stats , as shown below, were flaccid.

Friday, my little buddy and favorite VIXEN setp GE was the shing star of the day with over a 3% gain on sustained accumulation. This was an easy peasey trade if you track the GE/VIXEN setup chart on the blog or if you've got the setup on your own platform.
Every so often, and generally without much technical warning, GE blasts off , and pays off . . which is why IMHO it pays to monitor this little prima donna.

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