Monday, April 14, 2008

Dow And VIX

There is a saying in the market that goes like this. When the VIX is high it is time to buy and when the VIX is low it is time to sell.

VIX is a volatility index created by The Chicago Board Options Exchange in 1986. It is an important gauge of market volatility.

VIX measures the implied volatility of SPX options hence it will go up when traders expect volatility to increase.

You can treat the VIX as a fear indicator. When traders are afraid that market will drop sharply, VIX will go up. The reverse is true. When traders are more complacent, thinking that market will continue to go up, VIX will be low.

The VIX closed at 23.46 on Friday.

If you look at the VIX chart, you can draw a trend line ("Blue Line") connecting the bottom formed on Oct 07, Nov 07 and Apr 08 respectively.

These 3 points marked the beginning of significant drop in the Dow Industrial Average ("Red Line").

The VIX is not painting a good picture for trading next week. So do trade with care.

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