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 overview; for some thoughts on how to apply BBs to trading, has a good summary. The best detailed source of information on Bollinger Bands comes, not surprisingly, from John Bollinger’s own site, 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)


Bill Luby said...

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

Anonymous said...


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

Adam in DC

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