Monday, April 14, 2008

Three Top Bloggers Look at the VIX

Since what little ‘analysis’ there is of the VIX is usually of the quick and dirty variety, I was delighted to see that three bloggers who I have a great deal of respect for just happen to be featuring articles on the VIX this morning.

The first piece, from Condor Options, asks a basic question that I often grapple with when it comes to volatility indices: Is the VIX Impervious to Technical Analysis. I have to say that I am largely in agreement on the three main points made in the post:
  • Support and resistance don’t matter
  • Long term moving averages don’t matter
  • Correlation does not imply causation
That being said, in my opinion there are quite a few ways in which technical analysis can be applied to the VIX, but the universe of valid approach is much smaller for the VIX than it is for other indices. Part of the problem, as I have stated here on several occasions, due in part arises from the fact that in the case of the VIX, one cannot trade the underlying directly.

Ian Woodward is clearly of the camp that one can apply technical analysis tools to the VIX. In Whither Goes the Volatility Index – VIX, Ian lays out a detailed TA approach for looking at the VIX and interprets the implications for the markets based on various trading ranges for the VIX this week. I think there is some validity to Ian’s approach, but this is not how I generally use the VIX.

Last but not least, Tom Drake has an indicator that he calls the 2CS, which combines the VXO (the original VIX, prior to the 2003 modifications) and the CBOE combined put to call ratio to get a two dimensional view of options sentiment. In The 2CS Revisited, Tom discusses how he uses the 2CS to help identify market bottoms. His approach appears to be similar to mine in many respects. Also, the 2CS is clearly a relative of the OSI (Options Sentiment Indicator) that I publish and discuss in my subscriber newsletter.

I suspect the increased interest in the VIX is a by-product of the ongoing discussion in many circles that the VIX has not spiked enough to signal a textbook capitulation bottom, particularly given the magnitude of the macroeconomic concerns. I continue to think that while a VIX spike of 40 or more would placate many of those who are waiting for a more obvious sign of capitulation, this is not necessary to confirm a bottom, particularly given the current trading range of the VIX in the low to mid-20s.


bzbtrader said...

I'm sticking with my down and dirty VIX analysis today.

Bill Luby said...


I like your work on the VIX a great deal, Bob -- and it's anything but plain vanilla. I particularly like the indicators you use in your chart to help call the turning points.

You are indeed one of those exceptions to my 'rule'...

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