VIX: Our Trusted Friend

The more I watch and study the VIX, the more I like it. I've found the VIX to be one of my best leading indicators on both short term (intraday) and longer term time frames. It's all based around the common adage you've heard in the past, "When the VIX is high time to buy, when the VIX is low, time to go." I'd even go as far as to say that it seems to work even better then price action. Imagine if you went long on the high spikes and shorted on the low spikes -- back-test it and see how you would have done. We will likely have another high spike shortly, you may want to start putting your trading plans together on how to best trade it. Just make sure you give your trades enough time for you to be right if you're using derivatives. The market bounces, take advantage of it.

Lets take a look at some longer term charts and discuss what we see.

First we'll pull out to Monthly chart. The VIX charts only go back to 1997 so we'll pull the data back from there.

VIX Monthly Chart:



Notice that on the Monthly chart that between 97 and 02 it stayed in a range between 21 and 33. Conversely, the Bull run from 03 to 07 created a VIX range from 10 to 21.

We closed at 25.78 today.

The VIX is climbing higher on the monthly charts and in all likelihood will spike to 30 or 35 if we get some panic selling this week.

We'll leave the Green Shaded area on the VIX chart for a while to see how long we stay in this range. Should it stay in this range for a while we'll continue to see some wild price action.

VIX Weekly Chart: (Popping out of our range -- Bearish)



The Weekly Charts are showing a hard bounce off of 16 and no candle signal yet of tiring.

If you look at the Fib levels I've drawn, you'll see that the last time the VIX bounced off 16 (Oct 07) it bounced up to 31 in Nov 07 and finally 37 in Jan 08. My first target this month is 30 and then 33. If Oil hits 150 this is almost a given.