Friday, May 22, 2009

A Few Charts for Early Weekend Pondering, Possibly Instigating a Friday Afternoon Nap

Click on Chart to Enlarge

These charts are in no specific order of importance, but there were a few notable things that occurred today from my perspective. The chart above is the VIX/VXV ratio which I have shown before and is the ratio of 1 month implied volatility to 3 month implied volatility. The ratio oscillates around 1.00 over the long term. If the ratio is below 1.00, especially down in the 0.90-0.95 range, then that means that the options market is expecting near term (1 month) volatility to be less than longer term (3 month) volatility. Since the inception of the VXV, this data has been effective as a contrary indicator in that if near term volatility expectations are much lower than the longer term, then volatility is probably due to increase soon.

I also have suggested that a simple way to trade off this indicator (or use it as a confirming indicator) is to wait for the ratio to close below the lower bollinger band (meaning it is too low) and also below the 0.95 level, then to sell the market on a close back above the 20 day MA. The exit flag/buy back singal would occur when the ratio closes above its upper bollinger band AND above 1.05 (though 1.07 seems like it is could be used also and give better results).

Anyway, the "sell" singal occurred again today. It occurred around the April 20th week also, which obviously didn't mark a top, but neither has it given a buy back signal yet, so by the time it does, it could lead to a nicely profitable trade even from that first signal.

Click on Chart to Enlarge

This chart is the SPY/GLD ratio which is the S&P 500 price divided by the price of gold basically. The absolute value is not important from this perspective, but I wanted to pass along this chart and show how I use it as an indicator. I have never seen this anywhere else, but in the current market environment, it seems logical and has worked well.

With the overall down slope of the chart we see that stocks have been decreasing in value relative to gold for a couple years now. So since stocks are in the relative downtrend this is probably best used for sell signals for the market rather than buy signals. Anyway, I have not labeled the chart but you can look at it fo yourself in the following manner.....

Sell the S&P on the first close below the lower bollinger band after a recent close above the upper bollinger band. Then buy back the S&P when the ratio closes back above the upper bollinger band.
In effect you are noting times when the S&P hits an extreme under performance relative to gold, and you sell/short at that time. Then when the S&P shows an extreme out performance, you buy back.

Today the ratio closed below the lower bollinger band (after an uptrend with multiple touches of the upper band) giving a sell signal on the S&P. Now I am not necessarily bullish on gold. In fact, if I had to bet one way, I would say gold prices will fall looking out 3-6 months from now. In any case......recent signals were ....

Sell in Oct 07 and buy back in March 08
Sell in May 07 and buy back in July 08
Sell in Sept 08 and buy back in March 09
So not a lot of signals, but all very good ones. Until there is a change of character, I feel this is something to watch.
Click on Chart to Enlarge

This last chart is VXX. For anyone not familiar with this, it is a relatively new ETF that basically tracks the VIX. So it is a tradable equity unlike the VIX. The VIX is actually just a cash/spot value kind of like the S&P 500 price. You can trade the VIX via VIX futures, but they are a different beast than the VIX. With the advent of VXX, there is now a way to easily trade the VIX, however it has proven less volatile than the VIX cash price, so it is not identical.

What I like about this is that I think since this is actually a traded equity, the candlestick and technical analysis should be more standard than using the cash VIX data. On this chart note the high vloume bullish hammer on Wednesday followed by 2 more up days the last 2 days. We have not seen 3 higher closes in a row on the VIX this whole rally since March, so that is yet another sign of a change in character and probably downturn in stocks.

Have a good nap.

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