Tuesday, February 26, 2008

Volatility and Zig Zag

There was an interesting relationship between profitable long trades in the S&P and the Zig-Zag indicator applied to the VIX. Over the past 10 years there have been 4 periods when a trade initiated at turns in the Zig-Zag indicator have turned profitable long trades - with no failures. The 'buy' side Zig-Zag signal has matched reaction lows in the S&P very nicely. The 'sell' side Zig-Zag signal has been a little early, although during the 2000-2003 Bear market it gave a perfect signal.

However, one thing which has been consistent across 'sell' signals has been a lower 50-day MA compared to the 200-day MA. In the current market, this would approximate to another 6-months of VIX weakness/sideways action (and higher market prices). In terms of S&P returns it could be anything from 15-50% depending on market conditions (likely the lower end of this range for a bear market). Does this rank as another tick in the bull column?