All things considered, the CBOE Volatility Index (CBOE: VIX) acts pretty well. By that I mean, it has not quite signaled panic just yet, despite a pretty large gap down open in the S&P 500 Index Options (CBOE: SPX).
But alas, its modestly overbought. We commonly use 10% above the Simple Moving Average as an overbought level. As I type, that 10 day SMA is about 20.66, so any close in VIX over 22.5 or so will trigger that signal (remember if VIX drops from here, the 10-day SMA will drop a bit too). Here’s the catch though. That indicator provides more guidepost than Trading Rule. I ran some numbers recently, and it did not give you much in the way of SPDR S&P 500 ETF (NYSE: SPY) entries and exits. It proved especially mediocre in times when the overall longer term trend of VIX had turned up. We don’t know for sure whether the two-year downtrend in VIX has ebbed, but today’s higher high suggests its on the radar.
So perhaps we should set our sights higher. The VIX is running 20% above its 10-day SMA does give us a better contrarian signal in the market. Namely, it provides a decent timing tool to get a bit bullish. If you see a VIX close in the 26 range, it suggests “Fear” has taken over.
As to actual VIX trading, the “bunnies” didn’t exactly anticipate today’s pop. The big orders in VIX yesterday consisted of March put and put spread buys and March call sells. On the other hand, buyers did show up in April, but both the put and call side.