Friday, March 6, 2009

VIX Continues Bear Movement - no BS

This is my first blog on this board. Many of you know me as bsenright on the yahoo boards and many have asked I post here since I have been on a pretty incredible run using the VIX as a tool to manage my trades.

I love it when the VIX is actually telling us something. 40% the time the VIX is "NEUTRAL" telling us nothing and sitting in neutral territory, suggesting the market has not determined a direction. 40% of the time the VIX is "SUGGESTIVE", telling us there is a likely direction but it is not a strong sentiment. 15% of the time the VIX is "CLEAR" telling us their is a pretty clear direction or trend forming. And then 5% of the time the VIX is "SCREAMING" at us that the market is about to make a big correction.

What is great about when it is in the CLEAR catagory is, the CLEAR catagory almost always ends by entering the SCREAMING catagory.

This week we have been in CLEAR catagory the entire week. It's been a great week to read the VIX and trade against it. It is not always like this. But after today, it has now spent 14 straight days at or above the 20 day moving avg. This is significant for the VIX. Heck it is significant for a stock but the VIX seldome behaves like this, usually correcting across the 20dma after a big move up or down.

But 14 straight days is clearly telling us we are in a trend that will not end until we hit SCREAMING, meaning the VIX and the market, really need to capitulate. When that happens is hard to determine.

The chart below combines the VIX chart with the VIX PCR chart along with each of their 20dma's. The PCR helps identify those SCREAMING situations and combined with the VIX can show over optimism or over pessimism. OK, enough of explaining things.

The VIX remains very bearish and PCR suggests the market is expecting the market to have increased volatility. These two are very bearish but represent that we are not oversold since there are still bulls hanging around.

As long as the VIX remains above the 20dma, we are headed for a lower market. If VIX crosses the 20dma, we are likely entering NEUTRAL territory which could lead to a correction.