The lower open today shows this long-term downtrend has the power to keep going, but there are other signs that support that as well. Since no one indicator is an absolute predicter of what will come, it is always important to confirm a potential move with multiple tools.
Keith Harwood took us through the RSI yesterday (check it out here) and today we are looking at another sign that is helpful at confirming the direction that has momentum behind it. The VIX is an indicator from the CBOE that shows what the market expects volatility to be in the coming months. It isn’t a measurement of current volatility, per se but is more about what traders expect the market to be like moving forward. The higher the VIX the wilder the market swings are expected to be. The lower the VIX, the calmer it is expected to be.
While it also isn’t absolute, typically a rise in the VIX with indicate a drop in the market. It may not be a leading indicator but it can be a confirming one. Take a look at how the VIX has moved recently:
You can correlate the spikes in the VIX to the continuing failed rebounds the market has been making since the start of the year. Today it looks like it is moving up as the market drops. More often than not, the market will decline more chaotically than it rises. This is one of the reasons for the correlation between a rising VIX and a declining market.
By adding this as one of the indicators you use to verify the overall market direction, you can increase the likelihood of grabbing a trade that will move in the direction you expect. Don Fishback has really put together some of the best information on determining the odds an option trade has of succeeding to make it possible to zero in on more winners. His quick guide is a great resource and you can grab it here.
Keep learning and trade wisely,
Market Wealth Daily