Monday, February 20, 2012

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!


  1. Many Thanks John! SPDRs S&P500 Trust Series ETF SPY The positive script possible 137,00 138,00. NO CERTAINTIES in the stock market, only probabilities.
    “I have learnt that marathon is indeed a Greek word.” Olli Rehn, European monetary affairs commissioner, after 14-hours negotiations.

  2. Notable on the ES charts how much more intense the corrections are becoming. Should be interesting this next time around!

  3. hi john, did you see on both SP500 and Dj30 monthly charts negative divergence on True Strength Index too?New high on index but TSI lower and last two higher bottom (8/31/10 and 10/31/2011) with TSI lower.What do you think about?
    Thank you so much.

  4. Hi Daniele - I'm not exactly sure I to look at. 8/31/10 and 10/31/11 bottoms with TSI lower. Lower than what? Which TSI setting?
    The daily or weekly chart? thanks, John

  5. Hello John - I just found your blog and was playing around with the indicator in TOS. Is there a post somewhere on your site explaining how you added the moving average to your TSI (I am admittedly technically incompetent). Thank you Chris

  6. Good question Chris because in TOS it is not real easy to figure out.

    If you are looking at a chart of price, in the upper right click on Studies.
    On the pull down that appears click on Edit Studies. This should bring you
    back to the screen where you chose to load the TSI indicator and you find it
    as a Study on lower subgraphs. Now click just once on the TSI indicator in
    this location and in the lower portion of the screen all the Properties will
    appear. Just to the right of the word Plots will be a couple of tabs - TSI and Signal.
    Click just once on the Signal tab. This has the effect of making anything you do
    now active with respect to the Signal line (moving average) as opposed to the TSI
    indicator line. Now that the Signal tab is active, click on Show Plot to the right.
    This will put a black check mark in the white box. That's it. If you want the value
    of the signal to be displayed on the right side of the price chart, then also click
    Show Bubble. Click Apply and OK. This should return you back to where you started.

    Ps - you are not technically incompetent by a long shot. This took me longer to figure
    out than it is going to take you. :)

  7. Thank you for taking the time to explain that. It's rolling now! Off to play around with it. I really appreciate it - take care. If I find any more useful applications or combinations I will be sure to share it with you. - Chris

  8. Hello John, since your interest in VIX && TVIX lately, today I stumbled on this great blog about VIX and more:

  9. I've been following the TVIX 4-Hour time frame w/TSI 4~7 and it looks very interesting. Support and Divergences occurring together. Maybe just wishing for a breakout to the upside? But with with DJIA, SPY, RUT, etc in a bearish raising wedge pattern, the TVIX is about ready to rocket to the upside. DancingJoe