Click on Chart to EnlargeThe chart above is a chart of the VIX with standard Bollinger Bands around it. Also below the chart is a 10 period RSI of the VIX. I don't know how many people use traditional technical analysis on the VIX, but I have found some basic indicators to give timely warnings.
First, note that the VIX has touched its lower bollinger band. Since the VIX and the markets have strong inverse correlations, low VIX readings tend to correspond with market tops. The RSI is indicating a level of oversold VIX more so than any time since early May before the steady crush lower from mid May to mid July. I have a simple system for looking for VIX extremes that I have posted about before. That system is still a few lower VIX days away from really being in the danger zone, but I would heed the current VIX levels as a warning that this rally is long in the tooth.
Click on Chart to Enlarge
The chart above is a chart of closing VIX/VXV ratios with standard bollinger bands overlaid. Please follow the link below to the VixAndMore blog as that is where this indicator ratio originates.
The chart above does not show intraday lows, but I wanted to show a smooth view of the data that is easy to identify extremes. This ratio is nearing the 0.90 level and its lower bollinger band which have proved outstanding warning signals for soon to be market declines.
Taken together these data certainly should tell us to be on the defensive, or start to get aggressive with bearish trades.
Because this data is raising red flags, I may arbitrarily suggest exiting the QLD trade initiated yesterday before any signal comes from the indicator, or I may suggest a stop loss to use to exit the trade if the market turns south. In the past, trusting the indicator has proven the best strategy, but for real life trading, risk management is the most important part of successful trading.
Pete
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