Wednesday, June 6, 2007

The VIX and Bollinger Bands

I’m not sure how I managed to fritter away five months on this blog and spend so little time talking about Bollinger Bands (BBs) and the VIX, but today seems like as good a time as any to dive right in.

First, for anyone who needs a brief refresher on what Bollinger Bands are or how they are calculated, I refer you to the StockCharts.com overview; for some thoughts on how to apply BBs to trading, OnlineTradingConcepts.com has a good summary. The best detailed source of information on Bollinger Bands comes, not surprisingly, from John Bollinger’s own site, BollingerBands.com. Unfortunately, John does not provide a lot of his thoughts on BBs for free, but you can get a good idea of his thinking from a 2001 list of his 15 basic rules.

I have included a six month chart of the VIX below, with the default (20,2,0) BB settings in addition to a BB width indicator and an overlay of the SPX. For today, I am only going to offer a handful of observations (based on this chart and some research going back past the six month cutoff):

  • When the VIX tags its Bollinger Bands, it is usually a good time to think about a VIX mean reversion play
  • When the VIX tags its Bollinger Bands, it often signals a short-term change in the SPX trend
  • VIX closes outside of the Bollinger Bands (which we are on target for today) are almost always associated with dramatic market moves and/or changes in the trend
  • When the VIX BB width drops below 1.8, it frequently signals that consolidation is ending and a sharp move is just around the corner
  • Looking back to late-March, a VIX close above 15 would definitely be significant in terms of support and resistance (we are currently trading at 14.76)

2 comments:

Bill Luby said...

For those whose monitors might not display the entire chart, you can find the original here

Anonymous said...

Bill:

Just a heads up, but Marketwatch.com had a short blurb on the vix and the current market...heres the link

http://www.marketwatch.com/news/story/volatility-index-casts-surprisingly-bullish/story.aspx?guid=%7B04833CF9%2D8A29%2D4F1C%2DBEBE%2DA122D0D533B9%7D

Adam in DC

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