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Chart In Focus

A New VIX Indicator (That’s Really Not All That New)

Chart In Focus
May 03, 2019

A little bit of fear over the old saying about “Sell in May and go away” has led the VIX Index to pop up through its 50-day moving average (50MA), but stopping right at its upper 50-1 Bollinger Band.  The VIX’s pattern of higher lows is not confirming of the higher price highs, and for now that is a problem for the bullish case.  But it is a problem which can get resolved, as the March 2019 example illustrates. 

I show the chart above as an important prelude, even though I’m burying the real story somewhat in starting off with that.  But it contains important concepts which will lead to a fun chart below.  The chart above includes 50-1 Bollinger Bands of the VIX.  That means I’m using a lookback period of 50 trading days for both the centered moving average (50MA) and also for the calculation of a 50-day standard deviation (50SD).  That 50SD is used to set the spacing of the upper and lower bands by 1 SD above and below the 50MA, hence the 50-1 appellation. 

Now, getting around to the main point this week, I want to focus your attention to the upper band, because it has some really fun magic properties which are worthy of our attention.  This next chart looks at the upper 50-1 band compared to the SP500:

VIX's upper 50-1 Bollinger Band

The fun attribute is that it pretty reliably moves inversely to prices.  And it furthermore ignores some of the big whipsaws along the way that a good trend following model should rightfully ignore.  The long continuous move down by the 50-1 upper band since the Dec. 2018 low has correctly modeled the strong uptrend in the SP500. 

Where this indicator runs into a bit of trouble is at its low readings, which are associated with price tops.  It can take a while to fully construct a price top, and in the process there can be some mumbling in this indicator (and others).  So the first upturn of the upper 50-1 band may not be the final word for a specific topping event’s full process. 

At some point, though, the VIX’s 50MA starts upward, and volatility expands to make the bandwidth get bigger, and both of those together give us a rising upper band which is associated with a declining price for the overall stock market.  That will be an important indication when it finally and decisively appears, but it is not here yet.

Tom McClellan
Editor, The McClellan Market Report

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