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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Jon Tara who wrote (56253)	7/8/2000 1:31:50 PM
From: John T.	Respond to of 99985

Point well taken, Jon! VIX is a derivative of price; it cannot be oversold or overbought. However, VIX is a valuable tool for determining market direction. VIX is used as a contrarian indicator -- an extremely high VIX value represents fear and an extremely low VIX value represents complacency. The idea is that when everyone is afraid it is time to buy and that when everyone is complacent it is time to sell. In general, as a contrarian indicator, VIX gives reasonably good buy and sell signals. For instance, a buy signal is indicated when VIX rises to 30 and a sell signal is indicated when VIX falls to 20. Also, extreme VIX values are helpful in identifying market tops and bottoms. For example, on June 30, 1999, VIX hit an intra day low of 20.44. From that point, the OEX rallied 6% to a high of 735 on July 19. On July 16th, VIX hit an extreme intra day low of 17.70, which indicated a market top. The OEX didn't surpass 735 for four months. Conversely, at the October, 1999 bottom VIX was over 35, and when the market bottomed in April, 2000 VIX was over 41. So, when someone says that "VIX is oversold," I think they are saying that there may be a high degree of complacency which may indicate a change of trend. Use VIX with caution. VIX should not be used alone. It is only one tool for determining market direction.