A Vix Buy Signal was issued yesterday as Mole pointed out in a post at ES, and I've been having a look at
those this morning. Here's the Vix daily chart with the bollinger band
and signals marked over the last year:
This is the fourth buy signal issued over the last year and the others
were all superficially fairly successful but looking at them closely I
doubt that these signals mean anything significant.
The conventional wisdom is that you should see a major reversal up
within a week or so of the signal, but that isn't the case in recent
months, and I suspect that it is rarely the case. The way that the
signal is generated makes that inherently unlikely because if it is
anything, the Vix Buy Signal is a signal that after a significant dip, a reversal has already started.
The way that the signal is generated is that after the Vix breaks up out
of the bollinger band for whatever period, when it then closes back
within the bollinger band, a second subsequent lower close will give the
buy signal. In effect, after a significant correction, two consecutive
days of rally will issue the buy signal.
Given that reversals have
been short and sharp affairs over the last year, you would expect that
any such signals would mark the beginning of a significant rally, and
the signals in September, October and November all did that, as did the
failed buy signal in August for that matter. What appears to have
been the only confirmed Vix Sell Signal in May also immediately preceded a
sharp rally, and the failed Vix Sell Signal in January was shortly
before the major top then.
The Vix Buy Signal in late January marked a reversal that lasted a
couple of days, but was then followed by two significant further falls
before the bottom ten days later.
In effect all of these signals tell us that after a move significant
enough to cause the Vix to trade outside the bollinger band, a
significant reversal in the other direction is likely, and the buy or
sell signal will tell you when it has most likely already started. In a
market that is strongly trending up though, the best signal that a
sharp rally may be coming is that any significant dip has taken place. I
can't see that this signal is adding anything useful to that.
