Please refer to the other charts I have produced on this methodology.
It takes a long time to put these charts together and then to explain them for clarity for you.
Let's start from the beginning: 1. VIX is a measure of volatility of S&P500 options. If volatility rises, buyers of options are driving up options prices aggressively relative to weaker sellers. 2. Almost all the time aggressive option buying occurs when stock prices are falling. 3. Once VIX has risen 5 points, look for VIX to fall by 75% of its recent low to high move. Once that happens, we can mark that level as KEY SUPPORT because that is where BUYERS came into the market to accumulate stock. It could also be where short sellers are buying to cover shorts. 4. What we want to see is SUPPORT to hold on any subsequent setbacks. You can scroll back to see other examples of this phenomenon and come to the realization that this is the process by which you can read market action and VIX together to determine key support. 5. Notice what happened in November, then twice in December: BUYING WAVES didn't hold the market. So, we can assume these are Weak Buyers and from the looks of it, the market moved down and stopped these buyers out.
Keep a close eye on these KEY HIDDEN LEVELS and more using the analytical tools I have created here at TradingView.
The SPY fell to the 2nd lowest MASSIVE SUPPORT LEVEL on Friday and given the rally in futures tonight, it looks like a least a trading bottom here, if not a long term bottom.
B120626
⋅
I find it a weird yet interesting tell on how traders don't buy protection ahead of time, they wait until prices are in free fall before VIX starts spiking up fast. If the VIX and related put options are supposed to act as insurance, that's like buying insurance AFTER your house is on fire. The rates will be higher, lol!
Yet here we are in new territory with higher global risks, yet many traders are believing in the Fed and other central banks doing "whatever it takes" to keep prices moving higher to make the economy look good. I believe the VIX will stay in the 20 range, and we won't be seeing any 12 VIX levels for many years ahead. Why do you not include volume on the main SP chart? You do include it on the SPY chart. Volume spikes typical show levels of buying that indicate starts of trends.
timwest
⋅
Thanks for the comments and question about showing volume. On the top chart, I am trying to show the interrelationship between price and VIX. VIX is a measure of liquidity also, not necessarily of demand. What I mean by liquidity is if the sellers of options run out of willingness to sell, they step up their price and are only willing to sell at higher levels to accommodate their nervousness and perhaps their lack of capital. If buyers chase up and pay those much higher prices, then you see VIX rise. VIX is only a "last sale" indicator showing what the marginal buyer and seller agreed to in price. The only people willing to pay the "last sale" are the people who aren't paying attention to what the prices are and likely don't understand why prices are marked up. These are people who don't understand what is going on in the markets and those are the people who give their money to Wall Street Traders and Investors who are paying attention to what the correct price should be. As to why I shouldn't include volume on the top chart - It is because volume is secondary in importance. Volume that is high and low are interesting to me and there are various ways to use it. Range expansion is the best way to look for trends to begin, in my opinion.
B120626
⋅
I will interpret that to mean option writers, and if they feel their chances of profit from writing the option contract have a lower probability, they will balance their increased risk by increasing their ask, which lowers the liquidity at the normal price level, and any buyers still interested are forced to pay more from the writers asking for the higher prices.
The traders buying V I X at elevated prices might be trapped traders stuck in losing positions and they are trying to offset that with v i x contracts they can sell back, but Yes I agree, they are playing a risky game because the value of those option contracts will drop off fast as volatility decays as underlying price reaches a level where new buyers sense a bargain and start the demand which pushes price back up.
Range Expansion makes sense as a trend start clue
timwest
⋅
Correct - "sellers of options" is another way of saying "option writers"
timwest
⋅
One of the buyers of Volatility are the funds that are managing 2x and 3x funds of the VIX. If funds flow in during the day, then they need to add exposure. And I would add that Demand for options can come from anywhere, for any reason. If you don't know what a 'fair' or a 'normal' price is, then buyers and sellers won't know if they are getting a low price or a high price. Quoting services need to add more info for traders, in my opinion.
A-shot
⋅
"It takes a long time to put these charts together and then to explain them for clarity for you. " It is always worth it. This is what makes you The Timwest on TV. (i dont put much effort in reading charts with lack of explanation as they can always be read differently_)
timwest
⋅
Thanks 2use. The Wall Street Journal quoted my work using this methodology, but I don't know how much attention it garnered. I think this is a very important way to use VIX and I've heard far too many people say that VIX isn't that useful.
idle_crane
⋅
Just awesome, again. Thanks!
Victor.Y.F
⋅
Thank you Tim! Nice chart as always. Same view here. I’m expecting a 5 wave impulse or a 5 point triangle is happening.