How to Identify Ranging, Trending, and Spikes of Volatility Index (VIX)

Chart 1 displays the migration of the Volatility Index (VIX) during the infamous financial crisis of 2007-08.  If investors observe the VIX over a longer-term, the plot of the CBOE Volatility Index VIX will show the patterns of ranges, trends, and spikes. 

 

Chart 1: VIX movement between 10/15/2007 and 10/31/2009Source:
 Line Graph Outline form StockCharts.com.  Actual data compiled by Authors.

  

        Before the stock market imploded, between August 2007 and July2008, the VIX was valuated between 16 and 38.  This range moved much higher than the one in early 2007.  Then, the VIX started trending up until it spiked in October 2008, reflecting a global crisis fear. The skyrocketing reading was around 80, a level not seen often.  Even the market did not reach its nadir until March 2009, but the VIX registered the culmination.  It demonstrates that single technical indicator can’t work well, especially in a vigorous market.

 

It was assumed that the effort from the central banks around the world soothed and mollified the hysteria that filled every corner of the global market.  The market in this big swing mood corresponded to the expectations or disappointments of the bailout plan. The market derailed gradually from the strong downward trending, and the immense public jitters were progressively assuaged.  Gradually, the VIX trended downward since then.  The VIX dipped to 20 around October 2009, when many analysts thought the bottom had already been reached.

Technically, the volatility index VIX tends to operate with a reverse correlation with the general market.  The VIX gains value when the stock market drops, and loses value when the stock market rises. 

In the range bound stock market, the VIX is able to uncover sentiment excess, which can be employed to prophesy the market reversals.

Credited to: http://stockcharts.com/help/doku.php?id=chart_school:technical_indicators:volatility_index

 

        If you want to find out more information about this topic, you can visit:

http://www.barnesandnoble.com/w/top-5-technical-indicators-for-etf-trading-jing-zhang/1116853458?ean=2940148725206

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