Two ways to use the VIX

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If you remember my last VIX blog (click here), I told you there is more that meets the eye to the VIX than what the media reports. Tonight, I will tell you more about how to use the VIX to your advantage.

First, after you finish reading this post, I would recommend two things: Click here to read Ten Things Everyone Should Know About the VIX by Bill Luby, a favorite VIX professor.

Then when you have 45 minutes worth of time and want to know what option is and most important what is an option worth, click here and here by Dean Mousche, another VIX professor. It explains option pricing in an easy-to-understand, intuitive manner – along with a complete discussion of volatility, especially implied volatility. From there, Dean goes into the VIX – what it is and what it truly represents – and then talk a little about the importance of implied volatility to option trading.

Now, back to my post..

The chart above shows the VIX giving BUY signal. It is one way of MANY to use the VIX. Two days ago, I posted this chart in the Hub. That day, the VIX's closed @ 24.55 UNDER the upper BB "Bollinger Band" @ 25.55 after closing above it for the last few days (click here for article about BB). Remember when the VIX gives a BUY signal, it is bullish for the market and when it gives SELL signal, it is bearish for the market.

Keep in mind that this signal:

1. Is not a long-term signal. It changes fast.
2. Is not an automatic for next day though it could be. It might take a day or two to work out. 
3. It fails sometimes to generate any meaningful return especially when the trend is strong.

The second way to use the vix is called "The Trading Markets 5% rule" developed by Trading market, which suggests not to buy stocks when the VIX is 5% below its 10DSMA. You can look at where the VIX today relative to its 10Day Simple Moving Average. The higher it is above it, the chances are great that the market is oversold and a rally is NEAR.

Opposite is true, the lower the VIX is from 10DSMA, the more the market is overbought and sideways action or correction is around the corner. 

You see that blue line in the band? This is DSMA10 and the dotted and solid green ones are the 10 and 20 MA envelopes (click here for what they are). This simple plot will give you the % above or below the 10DSMA.

Note: I always keep my charts' configuration on the chart (far left corner) so you can duplicate them on your own for future use. Also, I will encourage you to experiment with changing the configuration to see if it can give you better signals. When you get a better one, please share. :)

These were two well-known strategies to interpret the VIX in much better ways than most do. Keeping them in your tool-box will give you an advantage in understanding how to analyze the VIX correctly.

Before I let you go, I want you to remember that when the trend is in strong force, most technical indicators will be late to give "immediate - spot on" timing signals as they do in normal times. This is one of the reasons why I prefer to be in top of the trend before it changes because once it changes, it changes swiftly and you are out of luck chasing things.

Did you join the fellowship? Are you a leader? Come join us!

As usual, I wish you as much as you wish for yourselves. Be happy!

GoodVibe
Mr. Lucky

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