TRADING 04 FUTURES

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***INTERESTING BY ART HILL ABOUT VIX
USING THE VIX TO TIME A MARKET BOUNCE... The S&P 500 Volatility Index ($VIX) measures the implied volatility for a basket of S&P 500 options, both puts and calls. Implied volatility rises when the S&P 500 declines because of an increase in the volatility of puts. A put option gives the owner the right to sell the S&P 500 at a specified price. Put premiums expand as the S&P 500 declines and this creates a strong negative correlation between the S&P 500 and the Volatility Index.

Traders using the VIX to time entry points often look for extremes that signal excessive fear or complacency. Over the last few years, a surge in fear often coincided with an intermediate low in the S&P 500. In order to measure fear extremes over time, chartists need to normalize the S&P 500 Volatility Index because this index actually trends. Since the 2011 surges above 40, the VIX has been trending lower and the extremes are getting lower and lower. Chart 9 shows that a move above 25 was excessive in 2012 and a move above 20 was excessive in 2013 and 2014. "Excessive" is a relative term that is subject to change, sometimes without notice.



NOW THE INTERESTING PART=VERY OVER SOLD....
Chart 10 shows the Percentage Price Oscillator (PPO) of the VIX in the main window, the S&P 500 in the first indicator window and the VIX in the bottom window. The PPO is set at (5,63,1), which measures the percentage difference between the 5-day EMA and the 63-day EMA. Five days is a week and sixty-three days is around three months. Fear is deemed excessive when the PPO surges above 20%, as it has done six times since 2011. While this denotes an extreme, note that the PPO of the VIX can move above 20 and keep going when the market remains weak. The signal to look for is a subsequent decline back below 20, which occurred this week. This suggest that fear is subsiding and the stock market bulls are finding their footing again.