VIX Index of Volatility

Larry Pesavento: ‘The VIX index tries to find markets that are overbought and oversold by using the amount of volatility that speculators are willing to assume. When volatility is high there is a great deal of fear in the market. When volatility is low, investors are complacent and not worried about sudden changes in stock movement. This index is probably one of the more difficult trading vehicles as it will sometimes not react to what prices are actually doing. This is not to say it will not work.  What it is saying is that it might not work exactly at the same correlation the trader is looking for in his analysis. The VIX index follows the patterns incredibly well and is tradable, but only for seasoned veterans or those that study the market dynamics for the index itself. As you can see from the enclosed chart it does show very nice symmetrical patterns that can be measured and predicted within limits. At this particular time the VIX index is coming back into the first level of the breakout that occurred in late August and early October. This should find support as it is also an important lightning bolt AB=CD pattern and a 0.786 retracement of the whole move up.

As always it is good to use sound money management and risk assessment when trading anything.  This is especially true with the VIX index because it moves so rapidly that it offers great potential for profits and equally painful losses.’