Early Indications Were for a Market Opening Up
Markets around the world were pointing up, and with a favorable manufacturing report and a relatively benign jobs report, and the DOW, Nasdaq, etc. did not disappoint shooting up right out of the gate. Long time market watchers know to watch other indicators though in order to gauge the strength of the rally, and today that sort of hard earned wisdom paid off.
Bull and Bear | Fear and Greed | Market Up and Market Down
If you’ve been around long enough, you’ve heard of bull and bear markets. Hang around a little longer, and you hear of the traders two biggest psychological challenges: fear and greed. Fear and greed are what move the market – and understanding where the psychological mindset of the market is at any given time can give a trader insight as to the direction of the next market move. Hmmmm… where have we heard that term before… needing to know the direction of the next market move… I digress… but remember that thought.
Enter the VIX – The Market’s Proxy for Fear and Greed
Market traders long wanted to be able to better gauge the next psychological shift so as to be ready to enter or exit the market prior to the actual up (or down) tick. Makes sense no? To make a long story short, trader wonks developed the VIX indicator as a gauge of market sentiment. As VIX rises, fear is the prevailing indicator and the market is in a falling pattern. As the VIX falls, the market is in a rising pattern. The beauty of the VIX indicator is that the further in one direction the indicator goes, the greater likelihood that the prevailing psychology is due to shift, and today was a great example of watching the shift take place.
Trading Activity Today No April Fool’s Joke When It Comes to the VIX
As the market rose earlier today, I watched the VIX fall to near term lows… not 52 week lows mind you, but certainly low enough. When combined with the minimal volume in the market, it became evident to me (and I’m sure a great many other traders) that there simply was no momentum behind today’s early rally… nobody was coming along for the ride. The market was up but the VIX was falling and volume was negligible. The conclusion? Either the market needed to pull back OR the VIX needed to rise… OR BOTH.
Needless to say by day’s end we got both. Although the market was up a healthy percentage for the day it was clear there was no tsunami of dollars coming behind the opening wave.
Have You Subscribed to Free Our E-Newsletter Yet? Get Trading Ideas Sent Right to Your Email Inbox as We Come Up With Them - Free!
Also Don't Miss Out on the New Binary Options Trading Signals and Free Binary Options Trading CourseHow Does Binary Options Trading the VIX Make This Knowledge Pay Off?
Ahhh… the million dollar question no? What did we say earlier about the relationship between the VIX and the likely direction of the next market movement? Exactly. The VIX is an indicator of the probable direction of the next movement. As VIX reaches low points while the market is rising – be on the lookout for a change in direction – particularly on low volume days. Conversely – as the market is falling like a stone on high volume, you ought to be seeing the VIX shoot through the roof. Binary options trading the VIX is the one pure play way to trade the intraday relationship between volume and direction of the market. If you think the VIX and market have moved as far as they’re likely to go on a given day given directions and volume then that’s you’re time to move on the VIX using your binary options broker (to my knowledge AnyOption (see our AnyOption Review) is the only broker offering binary options on VIX but I could be wrong – others may offer VIX now as well – I don’t keep track and they’re always adding new securities).
Another good question, and of course like any other investment the devil is in the details. While the binary options trading of VIX contracts is settled hourly, daily, or weekly (your choice depending on the contract type chosen), the VXX ETF trades based on the forward rate of VIX in the futures market, NOT the present spot price of VIX – and it is the SPOT price of VIX that matters to the market day trader, NOT the futures price. Ya gotta read the fine print on any investment. I learned a thing or two today about commodities ETFs similar to the VXX story which was a little bit of an eye opener… but we’ll save that for another day.
Be Prepared and Monitor VIX, Volume, and the S&P
For what it’s worth, the VIX remains at or within reach of its 52 week low, a contra-indicator for a near term high on the S&P 500. Don’t believe it? Check back in a day or two – I’ll post the chart and worksheet for readers to download and play with (I did it a few years ago… I’ll dig it up and update it). You’ll be surprised how tight the inverse relationship is.
Be wary though – because like any historical trading relationship past results do not guarantee future success… particularly when the market makers know the relationships too and can carry enough trading volume themselves to orchestrate the appearance of one set of conditions at their convenience.
Disclosure: No positions held in any above mentioned securities at time of writing.
If you’ve been following market developments today you should be seeing a sharp reversal in the VIX (upward) and a sharp movement of the S&P 500 (downward).
Phoney upward trading ultimately ends in sharp corrections like today. I hope you’re cashing in on the downward plunging movement of SPX or the sudden jump in VIX binary options.
Huge return of volatility today, VIX way up as S&P 500 falls like a rock.