Volatility Rises (and Falls) - $VIX

By Lawrence G. McMillan

It’s been quite some time since we’ve seen the CBOE Volatility Index ($VIX) rise above the 17 level – since early February, in fact.  But it did so this week, accompanied by strong advances in the other CBOE Volatility Indices, as well as Volatility Futures, ETFs, and ETNs.  These advances in volatility create trading opportunities, mostly when they reverse.  In this article, we’re going to review the most pertinent signals, and look at their track records.

The most well-known of the volatility indicators is the $VIX “spike peak” buy signal.  To quickly review the setup: 1) $VIX must be in a “spiking mode,” meaning it’s risen by 3.00 or more points over a 1-, 2-, or 3-day period (measured using closing prices). $VIX entered a spiking mode on Monday, June 29th, when it rose 4.83 in one day.  2) once $VIX is “spiking,” we keep track of the highest intraday price reached.  In this case, $VIX reached 19.80, intraday, on Tuesday June 30th.  3) a buy signal occurs when $VIX closes more than 3.00 points below that intraday high.  That occurred on Wednesday, July 1st, when $VIX closed at 16.09. $SPX closed at 2077.42 that day.  Thus a confirmed $VIX buy signal has occurred.

The signal is good for 22 trading days, or it is stopped out if $VIX closes back above that intraday high (19.80 in this case).  We know that this indicator has a strong track record – especially if the market is not trending upward at the time of the signal (it is not trending upward at this time) -- but I wanted to check the historic data to see if there was any significance to the fact that we haven’t seen one of these signals in nearly six months... 

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