Wednesday, February 7, 2007

The Composite Sub-10 VIX Bounce

Yesterday we examined the ungainly rainbow Hydra that comprise the nine bounces from a sub-10 VIX close over the past 17 years. Today our intent is to bring order from that chaos in the form of a composite view of those bounces, where the aggregate picture tells a more concise story than the individual ones:


In brief, the composite picture is that of a five day ascent immediately following the sub-10 close, with some sideways meandering thereafter, an aggregate high 12 days out, and finally a slow return to lower levels.

Today’s close of 10.65 on day nine is the lowest day nine close to date. If the current pattern follows form, we will have a three day rise of a little more than half a point, followed by a gradual return to the current level over the next ten day period. As a reminder, it should be noted that the current ‘bounce’ has produced the lowest low for days 5-9 so far, with the distinct possibility that the day 3 peak of 11.46 will hold up as the high value for the 20 days following the sub-10 close.

Just to throw a monkey wrench into this thinking and get away from discussing a sub-10 close for a moment, today was the only the third time in the past 13 years that the VIX’s 20 day SMA made a new low. The last time this happened, on 11/22/06, the VIX jumped 15% in three days and 25% in 10 days. Prior to that, that last new 20 day SMA low was on 1/10/94, when the VIX moved up 13% in three days and 30% in 20 days.

Generally, I favor paying closer attention to the relative VIX values than the absolute values. I suspect the balance of the week will tell us which script to follow.

3 comments:

Lauriston said...

I excerpted this article on my blog. I think absolute VIX is not so much relevant, but the 20day SMA is implying a very low relative VIX. Let's see what happens in the next 3 and then 10 days!

Bill Luby said...

Thanks for the mention, Lauriston. I find a combination of the 20 day SMA and the 10 day SMA to be an excellent trading signal for the VIX. Still, I wonder about some bear spreads to generate a little income while I wait for some volatility to return.

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