Wang’s Happy Trading

VIX is the CBOE Volatility Index. The definition of VIX is given here. So, what does VIX has to do with market directions? The definition says that “The VIX is a widely used measure of market risk and is often referred to as the ‘investor fear gauge’.” It seems that when VIX is high (fear is high), the market falls. When there’s lots of fear on the market, investors take their money out of the market. Ok, starting to make some sense…

Let’s see what the chart shows, comparing VIX to SPX (VIX tracks SPX, calculated from both calls and puts):

As you can see, looking at a 6-month daily chart, VIX and SPX are almost completely inversely related! When VIX rises, SPX falls, and vice versa.

Today, at 9:49am PST (12:49pm EST), I said, on the member board:
HappyTrading
Posted January 2, 2008 at 9:49 am | Permalink (Edit)
market/VIX
VIX intraday charts are getting very toppy, which could mean that the market is about to turn. Being cautious is still good.

At about 10:00 am PST (1:00 pm EST), SPX was at around 1444.51. At 11:00am PST (2:00 pm EST), SPX jumped all the way to 1456.54, a 12-point rise in one hour. In the same time frame, Nasdaq jumped from 2599 to 2629, a 30-point rise!

So, can we effectively use VIX, perhaps in conjunction with the major indices, to help us more accurately guage the near-term market directions?

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HappyTrading! ™