VIX Buy Signal Triggered

a couple of years ago

This is the first time I recall a VIX Buy Signal following a Sell Signal in such short succession. Can it be trusted? Did I miss the pre-Santa-Rally dip? Is it too late to load up on long positions? So many nagging questions but as usual Mike’s got you covered:

Let’s start with realized volatility, also known as historical volatility. The two spikes on my slightly modded ATR (which shows moves in ticks/pips) show us exploding from < 20 tick hourly candles into 40+ tick candles. In the end we lost 85 handles on the SPX in two sessions.

What usually happens is that everyone’s stops get cleaned out and once a credible looking floor develops volatility begins to subside as buyers try their luck at catching the dips. From here they either get run over as the next selling phase sets in or a crucial buy threshold is breached which signals to everyone that the worst may be over.

What I like here the most is that RV seems to be dropping continuously (red arrows) but I would not automatically assume that we are now heading higher on auto-pilot.

Here’s the VIX, which of course expresses summary implied volatility courtesy of CBOE option prices. Those gaps you see are indeed signs that we may have been through a pre-holiday shake out. But there usually is at least one encore which tests the mettle of early buyers.

I mentioned the SPX:VIX ratio on Wednesday morning as it had been pointing down since Thursday evening and only had to begin to point up after the Tuesday gap down.

Unfortunately since then the SPX:VIX has been trailing the index again which does not give me a lot of confidence, at least at this very stage.

Nevertheless technically speaking we are now looking at a bonafide VIX Buy Signal. However it comes one week after a Sell Signal that was a long time in the making.

And then there’s the IVTS which yet has to give us confirmation…

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  • Mike
  • a couple of years ago

About the Author

Hey there, I am one of the founding members of Red Pill Quants. I used to work as a systems engineer in Silicon Valley until I left the industry in 2008 to become a full time quant trader. It's been fun ever since.