KISS - Keep It Simple Stupid

VIX Tops

VIX Bottoms

False tops on VIX

What is the difference b/c Top A & B?
Top A in Oct 2005 was a true top for the VIX and bottom for the SPX b/c the bearish pattern on the MACD histogram/line graph also the indicators did not trace much higher highs like Top B. Top B in June 2006 made a much higher high on the MACD histogram/line graph showing strength to the upside and there should be a retest of the top or a likely newer higher.

What Is the VIX?The VIX is one of the investment industries most widely accepted methods to gauge stock market volatility. The first version of this index was developed by the CBOE in 1993 and was calculated by taking the weighted average of implied volatility for the Standard and Poor's 100 Index (OEX) calls and puts. However, in Sept 2003 they revised it to give a more accurate depiction of broad market volatility. In essence, VIX is a gauge of investors' confidence or non-confidence in market conditions.It is important to understand that the VIX does not measure the volatility of a single issue or option instrument, but uses a wide range of strike prices of various calls and puts that are all based on the S&P 500. What is formed is a more accurate measure of the markets expectation of near-term volatility.Determining Market DirectionIncorporating a wide range of S&P 500 index options truly makes this index a cross-section of investor sentiment. The VIX has an inverse relationship to the market, and a chart of the indicator will usually be shown with the scale inverted to show the low readings at the top and high readings at the bottom.A low VIX, a range of 20 to 25, indicates traders have become somewhat uninterested in the market and generally indicates a sell-off. The value of VIX increases as the market goes down and decreases when the market moves in an upward direction. A rising stock market is seen as less risky and a declining stock market more risky. The higher the perceived risk in stocks, the higher the implied volatility and the more expensive the associated options, especially puts. Hence, implied volatility is not about the size of the price swings, but rather the implied risk associated with the stock market. When the market declines, the demand for puts usually increases. Increased demand means higher put prices and higher implied volatilities. For contrarians, comparing VIX action with that of the market can yield good clues on future direction or duration of a move. The further VIX increases in value, the more panic there is in the market. The further VIX decreases in value, the more complacency there is in the market. As a measure of complacency and panic, VIX is often used as a contrarian indicator. Prolonged and/or extremely low VIX readings indicate a high degree of complacency and are generally regarded at bearish. Some contrarians view readings below 20 as excessively bearish. Conversely, prolonged and/or extremely high VIX readings indicate a high degree or anxiety or even panic among options traders and are regarded at bullish. High VIX readings usually occur after an extended or sharp decline and sentiment is still quite bearish. Some contrarians view readings above 30 as bullish.Conflicting signals between VIX and the market can yield sentiment clues for the short term, also. Overly bullish sentiment or complacency is regarded as bearish by contrarians. On the other hand, overly bearish sentiment or panic is regarded as bullish. If the market declines sharply and VIX remains unchanged or decreases in value (towards complacency), it could indicate that the decline has further to go. Contrarians might take the view that there is still not enough bearishness or panic in the market to warrant a bottom. If the market advances sharply and VIX increases in value (towards panic), it could indicate that the advance has further to go. Contrarians might take the view that there is not enough bullishness or complacency to warrant a top.