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If I’m anything as a trader, I’m curious. I wonder constantly. What about this? What about that? How do these interact? What has happened historically in this particular situation?
Excel has been my go to fact checker for probably close to a decade now. It’s simple enough for me and does what I need it to do. It has also convinced me that I could never be a computer programmer. My go to condition checking formula is a basic if>then statement:
“IF this condition exists, (and this, or this, occur at the same time), THEN state it as the value of: (the upper bollinger, current price, 10MA + $5, etc.)”
They can get pretty complicated sometimes and anything beyond a few conditions and I’m likely to have a formula error because I missed a parenthesis or a comma, and then my eyes start to cross and my brain gets the blue screen of death. My solution in these cases is to break the formula down in a basic word doc and put it together piece by piece.
I’m sure most people have not noticed this and may even roll their eyes at it because apparently we shouldn’t do technical analysis on the VIX.
I say, if it works, use it.
Personally, I use bollingers on the VIX and find them helpful. A recent observation,however, is what prompts this post. Specifically, that when the weekly bands get about as tight as they ever do, the probabilities of a weekly upper bollinger touch increase significantly and the chances of a weekly upper band overthrow (as what happens in crash-like moves) have a much higher chance of occurring. It appears to me that this forewarned of a potential serious depreciation for nearly every major drawdown over the entire timespan (nearly 25 years). It missed the major declines in the 2008 bear market as the weekly bollingers only squeezed to around the 50% mark, but I feel an adept trader could make this work as well.
I went back to 1998 for this study encompassing two bear markets and two bull markets. The information I’m going to share may work even better as a volatility play rather than a short index play if you can find a way to do it relatively safely (I’m open to suggestions if anyone has some ideas as I don’t play VIX futures or options as yet).
Something I’ve been noting over the past few weeks is the steadily rising Equity Put/Call Ratio 10MA. As a signal alone, a CPCE near its upper weekly Bollinger is one of the better breadth conditions I have found that can put me on alert to buy when the main DTL is breached. The vast majority of the time, Equity PCR rises during a pullback or correction, but it very rarely gets near the upper weekly bollinger when price has not pulled back a few percentage points first. In fact, in all the data I could view back to 2004, it has only happened five times. These occurrences have a few characteristics in common.
High numbers of stocks that are trading above their 200 day MA’s
Tends to follow some kind of extended run up.
After the S&P500 has had a good run, it’s only natural to start thinking that price has come so far that it’s getting a bit long in the tooth and perhaps a correction is right around the corner. The problem is that when too many traders and investors start considering hedging their bets and putting on some put protection most of you know what happens when there are too many leaning towards one opinion. Of course, it has a lower probability of happening. Especially when you consider these hedges decaying and keeping a passive bid under SPX where most hedging occurs.
I have something to share today that is just too weird to leave in a comment. I was going over my EOD checks Monday evening and I saw the Equity PCR pretty much at its upper weekly bollinger band while the VIX hasn’t really jumped at all.