Monday, January 26, 2009

Using Intraday VIX Reversals to Identify Market Reversals

I was going to wait for the market to pick a direction today and offer my thoughts on that direction, but since it looks as if indecision is becoming prevalent in the area of SPX 840-850, I thought it might be time to turn to a tangential subject.

Gio: The Hawaii Trader, has a post covering last week’s action with the title, Weekly Review: Using VIX Reversals to Spot Intraday Market Reversals…Over and Over and Over. As the title suggests, Gio claims that during periods of extreme market volatility the VIX often turns in advance of the broader markets and can therefore be used as a day trading tool. Unfortunately, at least to my eye, I find the accompanying chart provided by Gio to be inconclusive at best. To my (admittedly slightly astigmatic) eye, the DJI turns prior to the VIX in three or four of the five examples he cites.

More broadly, my own experience is that the VIX is a superb coincident indicator that occasionally lags turns in the SPX during periods of extreme market volatility – a phenomenon that I documented repeatedly during the last four months of 2008. My belief is that when the markets are falling rapidly and the VIX is spiking, investors frequently buy puts aggressively on the bounces, particularly when then fear the resumption of a bear trend. Very rarely have I witnessed the VIX turning before the SPX during periods of high volatility.

At some point in the future I will probably elaborate on this subject, but I would certainly be interested in hearing about the perspectives and experiences of other traders regarding the VIX as a day trading signal and as a leading or lagging indicator.


Anonymous said...


I'm always leery of any chart that arrives without any accompanying numerical analysis. Plus, it strikes me as a bit odd to apply the VIX (based on SPX options) to the DJI. Why not use VXD?

One thing I've found over and over is a drive to find something in the (insert favorite volatility index here) that isn't necessarily there. It seems to be the result of a fundamental ignorance of how the VIX is calculated.

He might be on to something but it's awfully hard to confirm that from some charts with arrows.

Anonymous said...

Speaking from experience. On an intra-day basis using the VIX to trade reversals works... until it doesn't.

Personally, I have found it difficult to trade a reversal system utilizing VIX even back in the low volatility days. The reason being is that when it is wrong, it is very wrong. Even with risk management in place there are periods where the VIX is consistently wrong intra-day causing long strings of losses and in some cases strings of losses occur over multiple days; long enough to wipe out a good portion of previously accumulated capital.

Using the VIX on a longer time frame has proved to be of much more effective.

Maybe some one has found something different, but since you asked for our experiences there you have it.

Damian said...

I've used it as a price confirmation with my own custom methodology - seems to work pretty well, but hey, I could be lucky.

Anonymous said...

I think it's awesome that you have a blog here concentrating on the VIX. As an options trader, I'm always watching volatility to get an idea of how it's going to affect my trading.

We've recently seen the vix break out to the downside of a short-lived upward trend. I think that means we head lower.

Good for me - maybe eventually I can get into some OTM options again.

Anonymous said...

yes using the vix to trade intraday definitely works

the reason why you are not seeing what "Gio" is claiming is because he is not sharing to his fullest

and im happy that is chooses not to share his ways because if he does, and all your blog readers will find out about it and stop working

John said...

My experience is "it depends" and thus is not a very helpful indicator for intra-day trading. Even on an intermediate-term basis, I have some reservations and would not proclaim using the VIX as a "no brainer" way to trading success.

Three problems I have encountered:
1) One must pay attention to when VIX contracts expire as there is some gamma impacts that might give false readings.

2) When investors head for puts and/or get nervous en mass, the VIX leads. When investors get nervous about certain sectors, i.e. in late 2007 through mid 2008 (Housing and Financials) yet stay bullish in other larger non-correlated sectors (Energy and Materials), the VIX lags and understates volatility.

3) Skew is not as appreciated as it should be. Sometimes across the curve, other months besides the front-month biased VIX might be more correlated to S&P moves.

Hope this helps.

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