VIX - How Low Can You Go?

Since I've had a little success trading VelocityShares 2X VIX ETN (TVIX) I thought a little homework on the subject of the volatility index VIX may help me grasp some fresh perspective. I decided to see if I could get a sense of the degree to which the VIX has been able to stray below its 100 and 200 dma over the past 20 years. And while I was looking at the VIX, I figured I may as well investigate how high the ES - E-mini S&P futures contract has been able to soar above these same moving averages during the same time period.


This project is a good example of the 'reversion to the mean' trading concept that says that price is usually only able to stray just so far from a moving average (mean) before it is pulled back towards the moving average. And in extreme cases, it can also illustrate the rubber band concept that says if price gets too far from the mean, when it finally can only be stretched so far in one direction and that is it, price releases its energy with a very sharp and swift reversal of direction.


For my assignment I chose to use an indicator I created several weeks ago for the ThinkorSwim platform. The indicator is flexible in allowing me to choose any ticker symbol and any moving average length of its price movement, then display the relationship between price and that moving average. 


This first chart is of the VIX on the top, ES on the bottom, both as viewed on a 20 year weekly with a 20 wma which roughly equates to the 100 dma, and with my indicator below price. The black horizontal line measures 1 on the far right and this represents the 100 dma. A reading of 1.25 is 25% above the 100 dma, and so on.


Notable in this first chart is the VIX reaching highs of 185 and 230% above its 100 dma 3 times in the past 4 years. And what I was most curious to see was how much below this mean was possible. We can see that in the past 20 years the VIX has only a few times reached 25% below the mean (0.75). And using this metric, the VIX attained a 20 year low just the other week.


The lower portion of this chart has the ES and its 100 dma data. Apparently a stretch of 10% above the 100 dma (1.10) has been accomplished 4 times, with 8% (1.08) usually about the max. We are currently reading around 6% (1.06) above the 100 dma.

Now what follows is a 20 year weekly chart with the VIX, ES and similar considerations using the 40 wma as a proxy for the 200 dma.

I suppose one could make the case that the VIX and ES are not as fully stretched beyond the mean on this 200 dma chart as the preceding 100 dma chart. In any event, the rubber band is looking plenty stretched and likely getting near to the point of saying 'no more'. 


Have a great week of trading!