Chart In FocusA New VIX Indicator (That’s Really Not All That New)

McClellan Financial Publications, Inc
Posted May 6, 2019

May 3, 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 look back 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:

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.

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