Wednesday, August 30, 2006

The Importance of Watching VIX

There is a lot of misinformation out there and the novice trader has to be careful which guru he or she chooses to follow. As pointed out in this Blog we are not in a Bear market but the rumors persist.

One of the more important tools you can use in your daily trading is the VIX on a short period basis. I like setting it up as a 4-minute chart but there can be other preferences. Today for instance (August 29, 2006) began with the VIX gapping up then sidestepping into the EMA 4. It arrived at that juncture a few minutes before 10 and then took off for its highs of the day. Right after 11 it began to roll over, probably from exhaustion and then caught its second wind about 11:30. At 11:45 or so it printed an obvious topping formation and then began sinking until about 12:45. Once more it gained some steam and continued to rise until 2 P.M. when the Fed minutes were released. It then collapsed immediately.

Why is this important? Because if you look at the SPY chart you can see clearly that the SPY tracks the VIX on the other side. Thus if you were watching the VIX you would have seen the market reversal clearly coming by noon based on the clear bottoming formation at 11:45. And you could have repositioned your trades accordingly.

The reason why I say that you have to watch out for so-called gurus is because there are people out there right this minute who are in positions of responsibility and trust who will say - "you can't trust the VIX anymore." But you can see with your own eyes that you can. So who you gonna trust...them or your own lying eyes? Trust yourself - always.

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