Vix up to Trix?

JungleGirl pointed out that the Vix closed below its lower Bollinger Band today. This is a pretty rare event and definitely has bearish implications. I wrote a few lines of code to make these charts. When the Vix closes below the lower Bollinger Band, the code paints the SPX’s candle for that day blue, so it is easy to spot these events. The first chart is the SPX since the March low (click to enlarge):

vix-extreme-1

Not counting today, there are four blue candles on this chart. After each one, the SPX was lower within a few days. And that’s during one of the greatest rallies in history, so this is a very robust shorting indicator.

Prior to March, we have to go way back to May of last year to find the next event. And here we have a blue candle almost marking the exact top of the March-to-May 2008 rally:

vix-extreme-2

Not bad, huh?

Here are three more blue candles preceding vicious downswings early on in the bear market:

vix-extreme-3

That’s it for the bear market. Here is a Vix barf that occurred on the mad rush up to the October 2007 top:

vix-extreme-4

Even here, shorting at the open of the next day, you would have had a nice profit with a little patience.

You could build your whole trading strategy around this one indicator, provided that you could wait patiently for months at a time for a signal, and then bet big.

Over the next few days, we should see some excellent shorting opportunities, if not an outright death-defying plunge.

Thanks for the heads-up, JG!

Note: if you are not familiar with the Vix or Bollinger Bands, here is a chart of the Vix with BBs where you can see the Vix closing below the green lower band today:

vix-bbs

You can read about the Vix here, but in general, a sharp drop in the Vix shows an extreme of bullish complacency: everybody’s all-in without a care in the world, and dreaming of all the free money that will soon be falling from the skies.

Bollinger Bands define an envelope of extreme prices. The recommended setting is two standard deviations. So, what the chart above is saying is that bullish complacency is two standard deviations beyond the recent norm.

5 thoughts on “Vix up to Trix?

  1. Mitch,
    Yes albania.

    Matt,
    I was thinking of buying the VIX 30 calls or selling some vix 20 puts but i didn’t hit the submit button

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