Can the VIX Predict Pullback?
But even as the market continued to rise in late May and early June, the VIX became sticky, remaining near 30 even as the 20-day historical, or real, volatility of the S&P 500 declined from 28 to 24 during the past month. This has led some to the conclusion that 30 was an important level that indicated the market was poised for a pullback. Yesterday’s sell-off -- and the accompanying jump of the VIX back above that round number of 30 -- seems to confirm this theory.
Using the VIX as a Predictor
One problem with this thinking is that the VIX is a statistical measure, and it's the result, not the cause, of any market move. Additionally, because it's a statistic, applying technical or charting analysis typically used on stock, isn't very effective.
But this isn't to say the VIX can’t be used as a predictive tool.
Most people tend to use it as a contrary indicator. That is, like most sentiment readings, when it gets relatively high -- an indication of fear or caution -- it's taken as a bullish sign. If it's low -- which is interpreted as complacency -- it's regarded as bearish. The problem with this approach is that the VIX not only can stay low for extended periods -- it was at decade lows for most of 2006 as the market hit all-time highs -- but it can also rise during bull markets, such as during the tech bubble.
Probably one of the best ways to use the VIX as a predictor would be to use it for short time frames, when it doesn't respond as it should to the underlying market conditions.
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If the student were to look into the analysis of time series as a branch of statistics, they would find such concepts as moving average, seasonality, and trend firmly ensconced in the toolkit. For those tools, then, it matters not what kind of numbers comprise the time series.
Granted, some concepts must be considered as specific to trading, or price-specific. Support and resistance is one, fairly obvious, example. Another might be the psychological price point, which is closely related to the above.. except, in your piece, we see the idea that the VIX at 30 is being regarded as such a "price point".
This analysis is probably in error, according to the distinction I have drawn. But it is so very, very, human.
