This will be the first in the series of sentiment
studies. Here we are looking at the VIX compared to the OEX. Typically,
you would see it compared to the SPX but I didn't want to delete my
drawings on the SPX chart. The correlation is close enough that this
should not matter. Although the old VIX, which is now the VXO is for the
OEX, I used the VIX.
The VIX itself is not plotted, rather two moving averages, the
10 day and the 20 day are. What we are looking for is general direction
and turns. Also, there is a 14 day RSI plotted for the VIX.
In
the chart comparison, what we find is that the trend of the moving
averages is down. No surprise, the market is up. The blue one is the 20
day MA and is less sensitive to turns. So, we will assume that until it
really turns, the trend is down for the VIX and thus the trend for the
market is still up. The 10 day MA, in red, is obviously more sensitive
to changes. We can get a heads up in potential change in direction here.
Also, with it, we can hedge, lighten up longs or for the gunslingers,
get short on it's upturns.
Let's look at some recent history
with it and then see what it might be telling us now.
On
November 6, 2009, there was an upturn on the 10 day while the 20 day
remained rather flat. This upturn did catch some of the pullback and
might have gotten our hopes up for a more serious decline in the
averages when it crossed above the 20 day. It was not to be. The turn
down should have dashed our hopes and the close back below the 20 day a
few days later confirming that the bears would have to wait to come out
of their caves.
On January 21 things started getting interesting again.
There was not only an upturn in the 10 day but it closed just above the
20 day. The 20 day started rising in concert with the 10 day and the
market went down as we might expect. There was a fly in the ointment
though. When we look at the RSI, we see that there was a bearish
divergence. Sure enough, both MAs were soon to turn down and the market
was off to the races, yet again. In the months since, we have seen the
VIX in decline and the SPX rising. However, at this time we do see that
the 20 day is rounding off and there is a clear bearish convergence on
the RSI.
