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Strategies & Market Trends : MARKET INDEX TECHNICAL ANALYSIS - MITA -- Ignore unavailable to you. Want to Upgrade?

To: yard_man who wrote (18472)	1/20/2004 11:31:21 PM
From: Rextar98	Read Replies (1) \| Respond to of 19219

No doubt t. Nice article! Ready to short? Thank Terry W for this. TradingMarkets.com Here Is One Time You Should Not Be Buying Stocks! Friday January 16, 1:30 pm ET By Larry Connors Timing Your Buying Decisions With The 5% VIX Rule Over the past few months, we have looked at the times that you should potentially be entering the markets and when you should be avoiding the markets. We saw that on a short-term basis it was better to be buying 10-day lows on the S&P 500, instead of 10-day highs. We saw that waiting for the market to drop 3 days in a row was superior to buying after it rose 3 days in a row. We also saw that there was a bigger edge buying when the S&P 500 closed in the bottom 1% of its daily range versus buying when it closed strongly in the top 1% of its range. Most of what we saw was counterintuitive, the complete opposite of what is preached. And more importantly, instead of hearsay and opinion, all this information was statistically backed and based upon the market's performance over the past 15-20 years. This Week's Market Lesson This week, let's go further. Let's look at when not to be buying. As important as it is to be a buyer when markets are most advantageous, it's just as important not to be buying when the market has no edge. As we just mentioned, there has been little to no short-term edge buying 10-day highs, buying after the market has risen 3 days in a row, and buying when the market closes strongly. And, another time to not to be buying stocks is when the VIX (CBOE:^VIX - News) (CBOE Volatility Index) is trading 5% or more under its 10-period simple moving average. Why? Because had you bought the S&P 500 every time the VIX was 5% or more below its 10-day SMA, and exited a week later over the past 18 years, you would not have made money! The market has risen 431.59% during this time and yet none of this gain (net) has occurred when the VIX was 5% below its 10 day-sma. Unreal, isn't it? When Is The VIX 5% Below Its 10 Day Moving Average? When everyone is jumping up and down. Lots of excitement out there, lots of warm fuzzy feelings about how the market looks. It usually occurs at the same time that the market is making new 10-day highs and/or is closing at the top of its daily range (and further confirming some of the things that you've learned over the past few months). It's happening after all the good news is already reflected in prices. Yes, things look great. But, as we have learned, prices already reflect this. Buying into these periods of time has led to "dead money". There's no edge whatsoever. The Stats Let's look at the details behind our findings. First, the VIX has closed 5% or more below its 10-day simple moving average about 1/4 of the time during the past 18 years. Over the past 4533 trading days, we've seen it close under this level 1,123 times. The market has risen over the next 5 days, 599 of these times (53.2%). This 53.2% is 4% less than if you had bought the market every day over this period and exited one week later. The S&P has risen approximately 902 net points during this time frame. But, it all came from the times the VIX was 5% or less under its 10-period moving average. Your average weekly percentage gain (and this is before commissions) was zero. That's right, a tremendous upward bias and it has all happened when the VIX was less than 5% below its 10-day ma. How Can You Apply This Information For Your Investments and Your Trading? First, there is no guarantee that what has happened over the past 18 years will happen in the future. But, assuming the VIX remains a valid indicator of market sentiment, you can apply these findings as follows: 1. When you are looking to enter a new trade during these times, you may want to wait until the market becomes less overbought. Simply waiting until the VIX was not 5% below its 10-day ma, has proven in the past to be a better time to be buying stocks. The statistics more than bear this out. 2. This may be as important as #1; You will likely want to be more aggressive in locking in long gains during this time. The more the VIX moves below its 10-day sma, the higher the likelihood of a reversal. And, this reversal may eat into and even completely take away from your existing profits. 3. Further on the VIX stretch. When the VIX has closed 15% below its 10-period moving average, the average one-week losses have been steep. It happens a few time a year and those are the times to be especially vigilant about not entering the market. 4. Being 5% below its 10-day ma doesn't mean the market has to reverse. The rally can and many times will continue. We just know that over the past 18 years, on a net basis, it's been dead zone with no edge. Finale The point of this week's lesson is to discuss why you should not be buying overbought markets. There are many ways to measure an overbought market, but in my opinion, the 5% VIX Rule is among the best. It's statistically backed and it allows you to measure the health of the market on a day-by-day basis. Also, I have a lot of research on when the VIX stretches above its 10-day ma (some of it can be found in the University Section and the Market Bias Section of www.tradingmarkets.com) and I'll share some of this research with you in a future column. Have a great week trading (and if you have any questions about any of this, please feel free to email me at LConnors@tradingmarkets.com). Larry Connors VIX stockcharts.com[l,a]daclyyay[db][pb10!b25][vc60][iLa12,26,9]&pref=G